At the recent Berkshire Hathaway (NYSE:BRKB) annual meeting, Warren Buffett riffed about gold. He stood by his longtime conviction that it is a bad investment. He’d rather put his money in shares of Berkshire.
But consider that gold has generated an annual average return of 26% over the past 10 years. As for Berkshire? It was only 6.23%.
So why has gold been such a standout investment? There are several big forces at work. First of all, investment demand continues to be robust. Part of this is from people buying bullion. But there has also been lots of demand from various gold-backed exchange-traded funds, which have accumulated billions in assets.
But perhaps the biggest driver for gold is its traditional role as an alternative currency. Until the 1930s, the U.S. was based on the gold standard. The belief was that this system would help to restrain government spending and inflation.
Of course, now the U.S. has massive budget deficits and is suffering from high commodities prices. Just recently, Standard & Poor’s reduced the overall credit outlook and may ultimately downgrade America’s AAA rating. As a result, investors are pouring their money into gold as a safe haven.
How can individual investors participate in this? Let’s take a look at three ways to invest in gold:
Miners: There are many top gold miners across the world. And one to keep an eye on is Barrick Gold (NYSE:ABX), which is the world’s largest gold producer. In 2010, the company produced 7.8 million ounces of gold. But it also has large reserves of copper and silver.
In fact, Barrick recently agreed to buy Equinox Minerals, which is a top copper producer. This should help diversify its platform. Besides, copper tends to have higher profit margins.
No doubt, Barrick has strong financials. It is the only gold producer with an A-rated balance sheet and generates nearly $5 billion in adjusted operating cash flows.
ETFs: A variety of these allow investors to get ownership in the physical gold. This can be more attractive than having to deal with storage and insurance costs.
The top ETF in the sector is SPDR Gold Shares (NYSE:GLD), which has a whopping $60.7 billion in assets. The gold is in a vault in London and is under the custody of HSBC Bank.
The expense ratio is also fairly low, coming to 0.4%.
Mutual Funds: If you do not want to pick stocks, there are some excellent gold mutual funds. One top offering is the First Eagle Gold (SGGDX) fund, which has $3.6 billion in assets.
Interestingly enough, it often has a good amount of bullion holdings. Right now, it accounts for 13.7% of the portfolio.
As for its stock portfolio, First Eagle has a bias for larger companies. Some of the largest holdings include Newcrest Mining, IAMGold (NYSE:IAG), Goldcorp (NYSE:GG), AngloGold Ashanti (NYSE:AU) and Barrick.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
