Gold: An Investment Analysis

The stock market can attract investors to invest in gold, but it is important to understand the differences between each gold stock. An exchange traded fund (ETF) is one of the most popular forms of trading on the stock exchange. An ETF is similar to a mutual fund, where the ownership of shares is divided among several investors. The ETF’s directed towards “gold” are shares that are divided into smaller shares and held by a larger organization. ETF’s directed towards gold include; DBP, DGL, IAU, GLD, GOE, and GDX. A derivative of an ETF is known as an exchange traded note (ETN). An ETN is more of a “debt product” that is backed by a bank with a high credit rating. ETN’s directed towards gold include; UBG, DGP, DZZ, and DGZ. Unlike mutual funds, an ETF or ETN can be traded on a constant basis.
MUTUAL FUNDS

An alternative to investing into gold stocks directly or through and ETF or ETN could be done through a mutual fund. The companies providing mutual funds are required to provide their investors with a “prospectus.” A prospectus explains the types of stocks and investments the mutual fund is geared towards. For example, an investor that is interested in gold can invest in a precious metals and minerals fund. They would be investing in gold, silver, diamonds, and many others. The prospectus would provide them with assurance that the investment contains gold stocks.

ROTH IRA

In many cases, mutual funds that are geared towards precious metals and minerals can be brought into a Roth IRA. A Roth IRA is an account that is normally created for retiring purposes. However, the investor can remove their assets without being charged a fee. If the Roth IRA fund matures, there would be a fee attached to the amount gained. The amount gained would also be taxed. The Roth IRA is tax free, and can contain several mutual funds at one time. An investor might consider investing in several mutual funds geared towards gold and unite them in a Roth IRA.

GREATER RISK, GREATER REWARD

Although there are many ways to invest, the quote “the greater the risk, the greater the reward” is a great temptation to many. A person that wishes to become an investor may decide to create a brokerage account and invest their money into a single stock. It is the greatest risk, and may provide a great reward. However, it is considered unwise for a novice to invest directly into stocks of any kind. A risk assessment should be conducted first to better understand their investing goals. A person that invests in gold directly should do so if they are capable of assuming catastrophic losses. High risk investing can produce mouthwatering gains but they can also turn money into sand.

The ETF and ETN would be a more suitable investment based on the fact that other parties are involved. Dividing the “lump sum” into smaller pieces and investing them into multiple ETFs and ETNs could absorb future losses. The price of gold could drop, but each ETF or ETN could handle it differently. On the same token, certain investments might rise while others fall. A person invested in these funds would not be able to enjoy a large profit if the price of gold rises significantly but would not suffer as much a loss. The other individuals invested in the same fund would absorb your gains or in a bad situation, “soften the blow.” In addition, the possibility of selling these shares as they decline will remain a possibility.

The mutual funds and Roth IRA accounts would provide the same “protective measures” as an ETF or ETN.” However, spreading a portfolio out and allowing other precious metals and minerals in would be a safe decision. Although an investment in gold might be the goal, limiting an investment to a single stock may not be the answer. A person investing in a mutual fund should consider it a “long term investment.” There will be incredible changes throughout the market and success requires selling at the proper time. It is also important to understand that mutual funds are not traded on a constant basis. Therefore, a person that wishes to handle their precious metals and minerals stocks on an hourly basis might refrain from using this method.

The majority of gold is traded under the acronym “GOLD” on the NYSE. It is a wild stock with a price that sways up and down regularly. Over a ten year period, gold showed significant gains. On August 16, 2002 a share was only worth $3.40. Over a few years, gold reached $22.70 on July 06, 2007. It was a decent growth, but continued to rise even more throughout the next four years. Gold eventually closed at $103.85 on October 15, 2010.

Natural gas is traded on the NYSE under the acronym “FCG.” In a ten year evaluation natural gas did not do as well as gold. On June 20, 2008, natural gas was priced at $31.04 a share. It declined to a mere $8.60 per share on March 06, 2009. One year later, natural gas rose to $23.07 per share on March 25, 2011. It was a slow, progressive rise that probably frustrated many investors.

COMMODITIES

Commodities are incredibly versatile stocks on the NYSE. In the blink of an eye they can gain or lose substantial amounts of money. Whether the commodity is gold or natural gas, the risk remains the same. It is impossible to know “what a person is willing to pay for a commodity share” for many reasons. However, traders that decide to invest in a commodity are paying attention to important data and signs. These decisions are often based on the media, production rates, and other stocks. This is why the term used to describe investors that do this is “futures traders”.

In a failing economy the government must make difficult decisions. In many markets the government’s decision can spark an investor’s interest. As an example, the largest rise in the price of gold was caused by economic problems in the United States. The Federal Reserve loaned money to banks during the financial crisis. The reaction was a sharp rise in commodities. Silver rose 3% in response to the fed’s decision. When the US Dollar is threatened, a futures trader tends to become interested in precious metals.

Annual reports and stockholder meetings are also important in a stock analysis. The United States government suffered during the great depression when companies were not transparent with traders. In order to resolve these issues, the government required companies to report their earnings annually. Regardless of social class or level of experience the information obtained by the government is a public record. So long as a person understands how to obtain the information, access to the report cannot be prevented.

Classification systems are used to divide stocks into categories. The SIC code, which stands for “standard industry classification code” is a number that is used to classify the different varieties of stocks. The SIC code was replaced by the NAICS code (North American Industry Classification System) but some databases incorporate both codes as references to assist traders. Companies that primarily handle the manufacturing of gold bullion are classified under NAICS code number 331419. A company that primarily deals with developing mining sites or preparing ores is classified under NAICS code number 212221. A trader that is interested in a particular stock can reference their annual report to make an educated decision.

An investment analysis that includes an NAICS code is incorporating information from the U.S. Census Bureau. In addition to the information provided by the U.S. Census Bureau, the Securities and Exchange Commission (SEC) can also provide data regarding specific stocks. The Securities and Exchange Act of 1934 requires each company to provide a public annual report called a “10k.” A 10k report can be found through a public system called “EDGAR.” EDGAR can be used by entering a company’s CIK (central index key). A trader that is interested in purchasing stock should retain a current copy of the company’s report for analysis.

As gold is a precious metal and a commodity, it is difficult to predict its future value. The word “gold” glistens and has a very popular place in the stock market. However, its price hit an “all time high” which deters many traders from investing in gold. It would be an unwise decision to invest in a stock that fluctuates rapidly and falls under a category that makes changes on a regular basis. The best decision would have been a long term purchase of gold stock in 2002. The next best decision would have been an investment in gold prior to 2007. In any event, stocks play by the same rule as gravity “what goes up must come down.” It is far too late to buy, as there is far too much to lose.