Gold Price Climbs Back to $700/Ounce

This stock market in the past month didn’t offer investors much of joy as major indexes gave back a big chunk of their gains after peaked later July. At the same time, gold has made a quite come back to close at a six-month high of $694 an ounce yesterday. It could go over $700 today thanks to the weak employment data. Actually, gold has been quite lately. Since breaking through the $700/ounce mark in early 2006, the bullion has been traded in a tight range between $650 and $700 since the beginning of the year. The rally of the metal in the past couple of days seems having something to do with European Central Bank’s decision to hold interest rate steady two days ago while a rate cut by the Federal Reserve two weeks from now is very likely.

Now that gold is getting close to the $700 per ounce mark, does it make gold a good investment for the long term?

I have been investing in good through a mutual fund (Tocqueville Gold Fund, TGLDX) since 2002 when spot gold was traded at less than $300 an ounce. Since then, gold really took off and the mutual fund TGLDX has been benefiting from the rise of gold price as well as the booming stock markets. As a diversifier, gold so far has worked quite well for me, at least for the short period of time. For long term, however, gold may not provide much boost for investment portfolio. Yesterday, there is an article on USAToday with the title Gold glitters, but it’s a bust as an investment, by Matt Krantz, arguing that from the historical return point of view, gold would be a terrible long term investment. The author analyzed gold price from 1933 and concluded that

Gold generated average annual price appreciation of 4.7% a year on average. That pales next to the 11.8% average return of stocks, measured by the Standard & Poor’s 500.

The problem for such a conclusion, of course, is that nobody is probably going to hold gold for 70 years just to get some 4% return. To me, 20 years seems to be a reasonable investment period.

Though when talking about investing in gold, there many gold expert suggest that the only way is told the bullion. However, when buying physical gold, there are plenty of extra fees, such as dealer markups, shipping and handling, and insurance. To profit, gold price sometimes has to go up a lot depending on the fees paid at purchase as when a deal buys back a piece of gold, the price paid is the price of spot gold (check out my posts in buying gold). For example, I bought a Buffalo coin back in March for $669 from Bullion Direct. After shipping and handling (insurance was included), the final cost is $685. Since then spot gold price has gone up from $647 to today’s $705. If I sell it today, I can only make $20 profit instead of $60. Not a good investment.

However, investing in gold doesn’t mean that intestors have to buy and hold the metal itself because of the liqudition problems. There are many alternativs such as mutual funds and ETFs to give investors the exposure to the precious metal category. Available ETF options include

• streetTRACKS Gold Shares (GLD)
• iShares COMEX Gold Trust (IAU)
• PowerShares DB Gold (DGL)
• Market Vectors Gold Miners (GDX)
• PowerShares DB Precious Metals (DBP)
• PowerShares DB Silver (DBS)
• iShares Silver Trust (SLV)

My own study has shown that adding even a small portion of precious metal in the portfolio can reduce the risk and improve returns. I am not bothered by the mediocre 4% return as suggested by the article.

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