INVESTMENT FUNDS REPORTER
Never before have buyers had so many ways to invest in precious metals.
Those who believe in a bright future for gold and silver can find multiple avenues, from exchange-traded funds to actual bullion, to bet on the metal of their choice. But not all these methods deliver the same results.
To find out which is right for you, consider these tips.
Mining stocks and precious-metal equity funds can offer the best bang for your buck if you're convinced that gold and silver prices are headed higher. That's because stocks benefit from a company's operating leverage, which tends to amplify the underlying price movement in the metal.
"You might have a 10-per-cent increase in the price of bullion, but you could have earnings rise 20 to 25 per cent," says Dan Hallett at HighView Financial Group.
The downside is that these stocks can take a particularly harsh beating in a market downturn or when commodity prices fall. Mining stocks can also suffer if companies experience financial or management problems, or are simply unlucky enough to own projects in a country that becomes politically unstable.
Investing in a diversified fund that owns a range of mining stocks can reduce your risk compared to owning a single stock. Exchange-traded stock funds (ETFs) offer a cheap alternative to mutual funds - something to consider because large fees eat away at returns over time.
The iShares S&P/TSX Global Gold ETF (XGD-TSX), which tracks an index of large-cap stocks, and BMO Junior Gold ETF (ZJG-TSX), which invests in smaller miners, each charge a fee of only 0.55 per cent a year.
Commodity futures funds
These give investors a way to play rising metal prices without worrying about the risks of owning individual miners. For instance, Horizons BetaPro COMEX Gold ETF (HUG-TSX) tracks COMEX gold futures, and hedges U.S.-dollar gains or losses back to Canadian dollars. This ETF charges a fee of 1.28 per cent a year, which includes trading costs.
However, because of the nature of futures contracts, commodity ETFs don't always faithfully track actual commodity prices. "I would not expect [results] to deviate more than a few percentage points," said John Gabriel, an ETF strategist with Morningstar Inc., but there is more uncertainty with a futures trading strategy compared with holding the physical commodity directly.
Holding gold or silver bullion may not offer the pop that equities can provide, but it can be a better alternative than a commodity futures ETF for investors who want to make sure their holdings closely follow the metal's price. "A bullion ETF is going to give better tracking of the spot price," said Mr. Gabriel.
ETFs offer an easy way to get exposure to bullion without having to worry about storage and insurance costs for the actual metal. Canadian-listed iShares COMEX Gold Trust (IGT-TSX), which is priced in U.S. dollars, charges a 0.25-per-cent fee. Claymore Gold Bullion ETF (CGL-TSX), which hedges its U.S.-dollar exposure to Canadian dollars, charges 0.53 per cent.
Closed-end funds, which issue a limited number of shares, are another attractive option, particularly if they trade below or at net asset value (NAV). Investors who pay a premium to NAV risk losing money if the premium declines, or if the price of the underlying metal falls or fails to rise. Sprott Physical Silver Trust, which charges 0.55 per cent a year, saw its premium rise recently rise as high as 20 per cent. In contrast, Central GoldTrust, which invests in gold, and Precious Metals Bullion Trust, which invests in gold, silver and also platinum, are trading close to their NAVs.
Bullion bars or coins
Investors can also buy gold or silver bullion from precious metals dealers although they'll need to store it in a safe place. This option may appeal to those who feel the need to own the metal in case of a financial Armageddon.
Bullion is best for investors who want insurance "should the worst happen" such as the collapse of the financial system, said Robert Rosenzweig, chief executive officer of Cache Precious Metals International Bullion Services. "It's a currency now - not just a commodity."
The problem with owning the physical metal is that you must pay for insurance and storage if you entrust it to a third-party institution for safekeeping. Also, if there should be a financial collapse, there might be a question of whether investors would get access to their metal.
There are a couple of smaller brokerage firms that let investors hold bullion in their registered retirement savings plans.
Barret Capital Management Inc. charges $45 per transaction to buy gold or silver bullion, which is stored at a Brink's warehouse. The minimum purchase is $5,000. Storage and insurance fees cost 10 cents an ounce per month for gold, and 1.5 cents for silver.
Discount broker Questrade Inc. charges a fee of $19.95 to buy gold bullion, which is stored at the Royal Canadian Mint. The minimum investment is one ounce of gold, and storage and insurance fees costs 10 cents an ounce per month.
© 2007 The Globe and Mail. All rights reserved.
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