By Myra P. Saefong,
Investors can still make a lot of money in the gold market — or prevent losing it, if they do their homework before they wade through a sea of investment choices.
Gold has been in a volatile trading environment, to say the least, with prices repeatedly climbing to new heights since 2008, only to lose big chunks of those gains in a single day. Deciding what to do with gold and how to do it has been a challenge even for seasoned investors.
After all, gold investment choices come in many different forms: bars, coins, jewelry, futures and options contracts, exchange-traded funds and gold mining shares. “The good news for gold and silver is the ‘mother’ of all bull markets has further to go,” said Peter Grandich, editor of The Grandich Letter. “The bad news is the opportunity to double or triple one’s money is behind us.”
So what’s an investor to do?
For one thing, don’t rush to sell. If you’re thinking of cashing out, carefully consider your options and have a good reason before you do, say most experts.
“While gold and silver have been relatively volatile in recent weeks, they have remained solid long-term uptrends,” said Brien Lundin, editor of Gold Newsletter. “These uptrends are based on fundamental economic and monetary issues — primarily too much currency floating around the world, the continuance of accommodative monetary policies, and governmental debt concerns so large that they cannot be addressed without higher levels of inflation to eat away at their values.”
That all means the long-term picture looks bullish for both gold and silver, “although the wiggly lines that make up the bigger uptrend will provide better times to buy and sell the metals,” he said.
He wouldn’t recommend that investors sell their core holdings in the metals. He advises investors to “hold some gold and silver bullion as financial ‘insurance’ — a core holding that they shouldn’t trade.”
That seems to be great advice, given the mostly upbeat outlook for higher gold prices.
Gold has reached record levels, but it “remains a long way from its real inflation-adjusted high of $2,400 an ounce seen 31 years ago,” said Mark O’Byrne, executive director at international bullion dealer GoldCore. And “whether gold will fall or not, at some stage, is irrelevant if one is buying for portfolio diversification, safe haven and store of value reasons.”
So the best way to make the right decision to buy, sell or hold gold is to first fully understand investment goals.
Are you looking at gold as a short- or long-term investment and why?
“Sell out completely if you believe that gold is in a bubble and any slowdown in worldwide economic growth will cause commodity prices, including gold, to tumble as inflationary expectations come down,” said Robert Barone, a partner and portfolio manager at Ancora West Advisors in Reno, Nev. Or “stay completely in (or even add to your holdings) if you believe that the U.S. dollar will continue to get weaker due to inflationary economic policies.”
“If you aren’t sure, take some off the table,” he said. “Sometimes, it is a good idea to take your investment out (or reduce it) and ‘play’ with the house’s money,” and you can do that by selling part of your holdings outright, setting stops underneath the current market price or using options.
That gradual approach may be a good choice.
If you’re not so confident over where gold prices will head next, you can “average in,” said Edmond Bugos, director of mining finance at Strategic Metals Research & Capital.
If you want to buy $100,000 worth of gold, but think gold prices are too high and aren’t sure prices will come down, you can buy $20,000 today, $20,000 in a week and $20,000 in another week and so on, he explained. “This lowers your risk a little … and can get you a good average price,” he said. So “averaging in” is “a good way to get your feet wet if you don’t have the patience to wait out the dips and corrections.”
Selling with confidence
But some investors will feel they have no choice other than to sell their gold for some quick, much-needed cash.
“If you need cash, now is the time to take gold off the table,” said Tom O’Brien, chief executive officer of investor educational services provider TFNN.com.
If you do decide to sell, getting a fair price won’t be easy.
“It is imperative that the investor do their homework when selling gold,” said O’Brien, who’s also editor of The Gold Report. “If the investor owns an ETF, or gold company … they will get fair market value.” Gold ETFs include the SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 144.06, +0.25, +0.17%) , ETFS Gold Trust /quotes/comstock/13*!sgol/quotes/nls/sgol (SGOL 146.58, +1.90, +1.31%) and iShares Comex Gold Trust /quotes/comstock/13*!iau/quotes/nls/iau (IAU 14.41, +0.18, +1.26%) . Year to date, all three have gained nearly 4%, close to the rise seen in gold futures prices for the period.
John O’Donnell, chief knowledge officer at the Online Trading Academy, referred to ETFs as “safe,” but said he’d prefer to own coins rather than gold mining shares. “Gold is money. A mine is a business [that] can suffer operating losses.”
Indeed, there’s a lot besides the actual price of gold that may move the stock price for gold mining companies, said Ancora’s Barone, including the company’s financial condition, debt levels, the quality of its management and existing mines, its exploration outlook, environmental issues and taxes.
Year to date, Barrick Gold /quotes/comstock/13*!abx/quotes/nls/abx (ABX 53.42, +1.26, +2.42%) , the world’s largest gold producer, has seen its shares climb about 0.5% compared with a nearly 4% rise in gold futures /quotes/comstock/21e!f:gc\m11 (GCM11 1,477.90, +5.50, +0.37%) .
The real thing
When it comes to physical representations of gold, selling and buying become trickier.
Selling an ETF is as simple as calling a broker. But “a little more research may be warranted if you have a coin,” said Mike Savage, a chartered financial consultant and founder of Savage Financial Group in East Stroudsburg, Pa. “There are many different values for the same coin based on the condition and scarcity of the coin. While buying and selling coins, the person with the most knowledge will usually win the negotiation.”
A coin dealer has overhead and needs to make a profit, according to Barone, so investors would need to “pay anywhere from a 3% to a 20% (or more) premium to buy and suffer a similar discount when selling.”
David Beahm, a vice president at precious-metals retailer Blanchard & Co., says gold and silver bullion coins are “sold for only a small margin above the spot price.”
Some dealers, however, advertise new bullion products as numismatic investments — in other words, they have special value to collectors — and so charge a much higher premium than is typically charged for a bullion product, he said.
“The reality is that these new mint products should have a value that correlates close to their precious metal content.” Read more about gold investment basics.
Meanwhile, with gold prices at historic highs, consumers are starting to look at their old jewelry as a source of cash.
Cash4Gold, an Okinawa, Fla.-based mail-in refinery that buys precious metals directly from consumers, has become a popular, sometimes criticized, means for consumers to monetize unwanted jewelry.
A company spokesperson said Cash4Gold “bases its offers to consumers on daily gold prices, the quality of gold being offered and the quantity,” and consumers have 12 days from the date on the check to accept its offer or request their items back, promptly returned, insured and free of charge. Read more about selling jewelry.
Gold Newsletter’s Lundin said consumers should not be tempted to simply cash the check they get from mail-in services, but take their time and “check with a number of local dealers” to get the best price.
When it comes to selling that old jewelry for its gold, TFNN.com’s O’Brien said the client should be getting about 80% of the melt value.
“The majority of dealers give way below that level because the public just doesn’t understand what they have is valuable,” he said. But “a very small amount of gold is worth big dollars. It doesn’t matter what shape it’s in.”
Myra Saefong is a MarketWatch reporter based in San Francisco.