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Investing In Gold Funds And Gold Etf's

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Everyone on here seems to espouse buying physical gold. But I'm thinking there's more upside (though poss more downside too) to buying funds like Blackrock Gold & General or a Gold ETF.

Could someone explain to an inexperienced investor like me if this is a good idea or not?



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Hi Graham.

Gold stocks are typically geared 3 times to gold. So if gold goes up 1%, the shares in general go up 3% - same deal on the downside. Sometimes gold leads the mining stocks, so there's a lag before the stocks react. At other times the stocks lead the gold price. This is *IN GENERAL* - not a hard and fast rule.

The stocks having been absolutely hammered over the last 6 months. One of the problems with a lot of mining companies is they rely on the market for financing and obviously with the "credit crunch" in some cases are struggling to get it - no cash, no company. This tends to be the smaller end of the market, such as exploration and juniors.

If you do invest be PREPARED for large swings to the +ve and -ve. You could be 50% up and a few months down the road 50% down, so if you're a nervous investor mining stocks ARE NOT for you.

Don't shove you money in all at once - set up a regular payment with your stockbroker and pay the same amount each month into your chosen fund / shares. I hold Blackrock Gold and Gen.

I would recommend you have a core position in physical gold. I personally would prefer to hold the physical as my core holding then add using paper gold (ETF and shares).

I personally have my gold / stocks spread thus:

  • 35% physical
  • 45% stocks
  • 20% Goldmoney

Stocks are also highly dependent on the political situation. Mines in unstable countries can be nationalised / taken over at the drop of a hat, so this is another thing to take into account. This may even start applying to current stable countries if things get really bad.

Hope this helps,


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If you are going to buy into an ETF you have the advantage of being able to buy and sell quickly, together with not having to hold the gold yourself. The disadvantage is that you only have their word that they have the gold they say they do. Then there is the risk of having it confiscated if the authorities ever decide they need to gold.

Personally I am of the opinion that the only reason they were set up is to manipulate the gold market. There is nothing stopping them from leasing out the gold and thats where they make the money. They get the lease money but more importantly it allows them to manipulate the gold market. If you gave me all those tonnes of gold I would lease them out to my other company who would use them to short the market. The ETF holders would of course suffer from the lower price. Once the price is low I would buy it all right back again.

This story should enlighten you as to the mechanism I am thinking of http://www.rumormillnews.com/cgi-bin/archi...ames/read/39506

As for gold mining stocks, you are making a leveraged play. If it costs you $500 to mine an ounce and the price hits $1000, then you make $500 profit on every ounce you mine. But if the price then drops to $600, you are only making $100. So your profits reduce 80% but the physical has only fallen 40%.

You must also look at the companies cash flow carefully. If they have some gold bearing rock then they need money in order to extract it and realize that profit. If they cannot obtain it then all you have is some rocks. This is particularly import for the juniors who often have no funds and no means to borrow any when cash is tight. Recall the old Mark Twain quote "A gold mine is a hole in the ground with a liar up top". You dont have any gold until you do.

So it all depends on what you want. If you want to speculate on the gold price, then you are best off simply buying and selling gold on the spot market. This allows you maximum leverage. If you want to hold gold for wealth preservation then physical will probably be what you want.

You can buy gold on the spot market using any number of brokers with margins around 50c. This allows you to enter and exit positions with little cost. I will do this, perhaps selling my position after only 5 minutes. Even easier and more profitable is to speculate with one of the spread betting companies. That way any profits you make are free of tax and you can bet as much as you like. Buying on the spot in 100 oz contracts can be fearsome. I once lost 10k in a single day. Trading gold is no different from trading FX pairs, it is a currency and traded as such. You are highly likely to end up losing money if you are not experienced. Yet it is not any different to trading an ETF. You can buy a gold contract, hold it and sell some time in the future. Its all paper obligations. In addition you can buy gold futures or gold options too.

Thus ETF's really are for total nub wits. Either do the gold trading or buy and hold the gold somehow. You can hold it offshore in something like Bullionvault and be pretty sure you have a stack of gold there. The alternative is buy gold and take delivery yourself. Then you have to dig a hole to bury it, keep it in a safe at home, or even rent a security deposit box. I wouldn't recommend the box though, they recently raided and opened them by force in London. You had to go prove it was yours, rather than them proving it wasn't. They are also expensive to rent.

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