powered by GlobeinvestorGold.com

Rob Carrick

In this Issue

Brilliant options

Rob Carrick


OTTAWA (GlobeinvestorGOLD) — The golden rule of investing in Canada’s resource wealth: rocks and trees are nice, but there’s something special about gold. When gold prices soar, there’s serious money to be made. You just can’t get the same buzz when nickel, aluminum or lumber prices take off.

Then again, it’s easy to play rising nickel and aluminum prices — just buy Inco or Alcan. Buying into a gold rally is a little trickier because you can either buy the shares of individual producers or you can invest in the metal itself. Whichever way you choose, the ever-expanding universe of exchange-traded funds offers an easy solution.

Let’s say you’d like to buy gold directly rather than benefiting from a rise in the share price of companies that produce it. Instead of messing around with gold bullion or gold coins, consider StreetTracks Gold Shares, which trades on the New York Stock Exchange under the symbol GLD. Gold Shares are designed to be a proxy for owning gold bullion, which is why their price is pegged at one-tenth the spot price of gold. Just recently, GLD traded around $42.59 (U.S.) while the gold spot price was $426.35. The bottom line here is that you can track the price of gold in an investment that couldn’t be easier to buy.

ETFs are essentially stocks that reflect an interest in an underlying stock index or, in the case of Gold Shares, a commodity. You can place an order to buy Gold Shares through any investment and pay as little as $25 to $29 (U.S.) at an on-line broker. ETFs are like mutual funds in that they deduct ongoing management fees from their gross returns, but the fees with ETFs are tiny. Gold shares have a management expense ratio of 0.40 per cent, compared to an average 3.25 per cent for precious metals mutual funds. Gold ETFs are also traded on exchanges in England, Australia and South Africa. A competitor to Gold Shares is reportedly awaiting U.S. regulatory approval so that it can be trading on the American Stock Exchange.

Other than the inherent volatility of gold, a key thing to be aware of with Gold Shares is that they’re priced in U.S. dollars. If the Canadian dollar were to resume its recent climb against the U.S. buck, then the value of your Gold Shares could be undermined, so to speak. No such concern exists with an ETF listed on the Toronto Stock Exchange, the iUnits S&P/TSX Capped Gold Index Fund, which trades under the symbol XGD and goes by the nickname iGold.

This ETF offers an alternative way to play gold — instead of focusing on the value of gold itself, you tie your fortunes to the 19 gold-mining companies that comprise the S&P/TSX capped gold index. Barrick Gold accounts for about 27 per cent of this index, while Placer Dome accounts for 20 per cent. The dominance of these two stocks in the index handicapped the iGold when gold prices surged a couple of years ago because both were lacklustre. But Barrick, in particular, has been comparatively strong in the past year, and this has helped the iGold outperform precious metal mutual funds over that period.

Precious metal funds have proven to be a very profitable way to play gold prices, more so than the iGold if you measure over the past three years. Precious metal funds do have some flaws, though. The ongoing management fees they charge are high, and you must hold onto them for six months or longer to avoid a short-term trading penalty. You also don’t have much control over the selling price of your fund units because all sell orders get you the end-of-day unit price. Imagine you enter a sell order after gold prices peak in the morning, only to see a price pullback after lunch that drags down the price of your fund. If you’re speculating on gold prices and want to be able to bail out at whim, ETFs are easier to dump because they can be traded at any time during stock market hours. Heck, you can even short them if your view of gold prices is less than golden.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

Back to top