With stocks being a tad bit on the expensive side and global economic growth not being what it once was, gold is getting a hard look again from many investors. Heck, even bond king Bill Gross is saying that gold is a better deal right now versus fixed income investments and stocks.
And he could be right.
With interest rates being in the basement — for what seems like forever — Gross believes that traditional asset classes could be heading for a severe fall. As many central banks have kept rates low or even negative, investors have plowed too much money into everything else in order to get a return.
The problem is that global growth hasn’t accompanied the low rates. In his latest August letter to investors, he said that there is a rising chance that investors will see negative returns or outright losses across a number of asset classes — potentially for years.
Under that scenario, gold and other hard assets begin to shine.
So, with that in mind, adding a dose of the golden stuff could make a ton of sense in the current environment. And here are seven ways to do just that.
How to Buy Gold: Get Physical
Obviously, one of the best ways to play gold is just to own the stuff outright. But buying it this way does come with its own set of headaches, and that’s why using a physically backed exchange traded fund could be the best answer.
And the iShares Gold Trust(ETF) (NYSEARCA:IAU) is the best ETF out there to do just that.
IAU stores its golden bars in a vault on behalf of its investors and each share represents 1/100th of an ounce. Buy one hundred shares and you have one ounce of the golden stuff in your portfolio. It’s as simple as that. As an ETF, IAU makes things easy and cost-effective. You can trade throughout the day and if you need to sell it, you don’t need to worry about finding a dealer or accepting less than it’s worth.
As for the expenses, IAU truly shines. Its rival fund — the SPDR Gold Trust (ETF) (NYSEARCA:GLD) –- may be bigger in terms of assets, but it costs a lot more to own. IAU only costs about half of its rival. That means, it will more closely match the spot price of gold. For long-term investors, that’s critical for returns.
All in all, when it comes to physically backed gold ETFs, IAU should shine in your portfolio.
How to Buy Gold: Play the Futures
One of the major issues for owning the physically backed ETFs is the issue of taxation. Hold the IAU in a taxable account and you could be in for a world of hurt. That’s because the IAU and GLD are treated as collectibles in terms of the IRS. That means that long-term gains in these funds are taxed at 28% instead of the usual capital gains rate of 15%. This is the same as Beanie Babies.
That’s where futures-backed exchange traded notes could come in handy.
The UBS E-TRACS CMCI Gold TR ETN (NYSEARCA:UBG) tracks a measure of the collateralized returns from a basket of gold futures contracts. UBG uses a mixture of futures — five constant maturities, ranging from three months up to three years — in order to limit the effects of contango and backwardation on the portfolio. That mix of futures has allowed UBG to track prices over its operating history.
The real advantage of UBG comes at tax time. As an ETN, long-term capital gains are taxed at just that 15% rate. Moreover, even though it uses futures, it’s not a commodity pool. So there’s no phantom tax or K-1 statement to deal with; meaning, that this gold fund is great for a taxable account.
How to Buy Gold: Choose the Miners
It stands to reason that if your main source of income is derived from a commodity, when that commodity rises in price, so will your earnings. That certainly is the case for the gold miners. Even better is that often an X percentage increase in the price of gold will result in an even bigger jump in the miner’s bottom lines. That’s due to the miners various stable fixed costs of production.
Speaking of those costs, these “all-in sustaining costs” are the price floor for the miners. Anything above that becomes pure gravy. And gold’s last drop cash costs have been declining as well, which means that the miners are now making more money when it rises.
The miners also have the ability to do something those “physical” ETFs, such as IAU can’t — pay a dividend. Many have gold-price-linked dividend policies. Higher gold prices will equal higher dividends for their investors.
The nearly $11 billion VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) is still the easiest way to play the miners. The ETF tracks 50 of the largest gold producers from across the globe. This includes all the sectors heavyweights like Barrick Gold Corporation (USA) (NYSE:ABX), Newmont Mining Corp (NYSE:NEM) and Goldcorp Inc. (USA) (NYSE:GG). Throughout its history, GDX has managed to reflect the general segment with a tad bit more “oomph.”
How to Buy Gold: Go Small
If the major miners offer a leveraged play on the price of gold, then the junior miners offer even more.
Serving as exploration companies, many of the juniors have just one or two mines under their belts. In many cases, those mines might not be operational yet. The juniors will often take the risk to get these claims started.
This is when the majors usually step in and buy-out the gold production. This means that the juniors are often the key cogs in the future gold supply machine. When prices rise — as they are now — the juniors are more valuable due the amount of gold in their potential reserves.
Also from VanEck, comes the largest way to play the juniors — the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).
Like its sister fund — the GDX — GDXJ tracks a basket of gold miners, but this time it’s 49 of the smallest ones. The names might not be familiar, but these stocks are the gold powerhouses of tomorrow, or at least they help some of the larger miners keep their supplies up.
And GDXJ has delivered on its even greater leveraged promise. Returns for the junior miner ETF have been higher in up markets and lower in down markets, when compared to the larger GDX.
How to Buy Gold: Start Streaming
Most investors will stop there when it comes to playing rising gold prices. However, there is another way to get your golden fix. And that’s through royalty firms.
A royalty firm will either provide capital or a physical mine itself to another gold firm. In exchange for that capital/mine, the royalty firm will receive a fee based off of production. The real win for these firms is that they don’t have any of the risks associated with actually mining the product: no labor costs and no environmental hassles. Nothing. They just sit back and collect a check, while their investors collect a big dividend.
In terms of the streamers, Silver Wheaton Corp. (USA) (NYSE:SLW) happens to be one of the best. As its name implies, SLW started as a silver streamer. However, over the years it has added a ton of gold to its arsenal — including an $800 million purchase of assets from Vale SA (ADR) (NYSE:VALE). Today, it receives streams form over 22 operating mines and has eight more currently in production.
Dividends at SLW have moved up and down with old prices, so any rise should benefit its bottom line and what investors can receive.
How to Buy Gold: Write Some Calls
How would you like to score a trailing 13% yield from your gold investment? Well, with the Credit Suisse X-Links Gold Shares Covered Call ETN (NASDAQ:GLDI) allows you to score one.
GLDI is a unique play on gold. In a nutshell, the fund basically owns shares of the uber-popular and previously mentioned GLD. GLDI will then sell monthly out-of-the-money covered call options on the GLD shares it holds. These call options provide GLDI with an up-front premium for the right to buy the shares at a set level. GLDI takes these premiums and distributes them to its investors as hefty cash dividends.
The strategy produces some big-time dividends without any added leverage. The caveat is that dividends from the fund have been kind of lumpy. Additionally, a rising price environment will cap the upside of GLDI. However, the option premiums should be higher, so more income and less capital appreciation.
But, for investors looking for some serious income from their gold investments, GLDI is really the only game in town. Perhaps even more so, when you consider that writing one covered call on GLD yourself will require owning nearly $13,000 worth of shares at today’s prices.
How to Buy Gold: Go Bananas
Suppose you really think that the system may collapse and gold prices will go through the roof. Some analysts have predicted that this could very well come true in a few short years. Estimates of $10,000 gold are once again making their way into the headlines.
With the potential for such huge increases, maybe it’s time to add a bit of juice to your holdings in this area. We’re talking leverage and over a short period of time, it can dramatically increase your returns.
Both the ProShares Ultra Gold (ETF) (NYSEARCA:UGL) and Direxion Daily Gold Miners Index Bull (NYSEARCA:NUGT) allow investors to add that extra juice to their gold and miners investments, respectively. UGL offers twice the daily exposure to prices of the golden stuff, while NUGT provides three times the daily exposure to the previously mentioned GDX.
Keep in mind, that funds’ leveraged effect does work both ways, and losses will be magnified as well. Really, the two leveraged ETFs should be used sparingly and only for short periods of time — ideally, for less than a week. But if you’re really confident that the golden bars will keep on rising, then buying both could be worth a gamble. Just don’t bet the mortgage money.
As of this writing, Aaron Levitt was long IAU.