Gold: Know What You Are Buying

Investors have a new-found love in the yellow metal during the current episode of Financial Armageddon. There have been many reports of how people are not only buying gold but also want physical delivery in their possession. In addition, the lack of supply for the current demand is producing buyers willing to pay an extra premium and gold dealers are not going to argue with their customers for good reason.

Gold rush as investors pile into bars
Bullion dealers are busier than at any time since 1980 as retail investors, concerned with the safety of bank deposits, rush to buy gold coins and bars. “Dealers are doing incredible business,” said Philip Olden, managing director for jewellery at the World Gold Council, an industry body. “Some are calling up and saying they have run out of stock.”
Satisfied buyers rush out with their glittering bounty
Furtive men clutching holdalls and rucksacks slipped through the entrance to the marble-clad lobby, evading the FT’s questions on their way to the company’s offices on the second floor. Mainly first-time gold buyers, customers were anxious to unload their cash inside the imposing security chamber and claim what they could of dwindling bullion supplies.
All that glisters
If your neighbour starts hoarding Chinese pandas, American buffaloes and Canadian maples in the cellar, do not be alarmed. Demand for gold coins and bullion bars has soared. The yellow metal’s allure as a safe haven in troubled times has sparked a rush into physical gold not seen since the 1979 oil crisis. Investors are right to hedge their bets in the current financial turmoil. But gold’s appeal could prove illusory.
Sold-Out Buffalo Coin Is Gold Standard of Loose Change
The U.S. Mint is temporarily halting sales of its American Buffalo 24-carat gold one-ounce bullion coin because “inventories have been depleted,” Mint spokesman Michael White said yesterday. The coin, based on a 1913 design, was released in 2006.
More gold coins halted as investors seek haven
Citing extraordinary demand, the U.S. has broadened its freeze on sales of gold bullion coins in another sign that retail investors who are priced out of the futures markets have been piling up their holdings of the metal as a hedge against market uncertainty.

As we can see from the above articles why investors might — all of sudden — be interested in finding some gold themselves. With physical gold supplies not readily available, many investors are now desperate to find another way of investing in the gold markets.

I have heard people saying “BUY Gold Mutual Funds. It’s the same thing as owning gold” — Is it the same thing?

Let’s take a closer look at this ‘advice’ by looking at Fidelity’s Select Gold Portfolio (FSAGX) versus SPDR Gold Trust (ETF) (NYSE:GLD).

Fidelity’s Select Gold Portfolio (FSAGX)

Daily Chart with 50- and 200-day Moving Average

SPDR Gold Trust (GLD)

Daily Chart with 50- and 200-day Moving Average

Daily Chart with InVivo Swing Trading Tools

As we can see from the above charts, there is a BIG difference owning a gold mutual fund and owning a Gold ETF. Let’s see the differences.

Fidelity’s Select Gold Portfolio investment strategy is: “Investing primarily in companies engaged in exploration, mining, processing, or dealing in gold, or to a lesser degree, in silver, platinum, diamonds, or other precious metals and minerals. Normally investing at least 80% of assets in securities of companies principally engaged in gold-related activities, and in gold bullion or coins.”
SPDR Gold Trust investment strategy is: “SPDR Gold Shares offer investors an innovative, relatively cost efficient and secure way to access the gold market. SPDR Gold Shares are intended to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that interest through the trading of a security on a regulated stock exchange. The introduction of SPDR Gold Shares was intended to lower many of the barriers, such as access, custody, and transaction costs, that have prevented some investors from investing in gold.”

As we can see from the above investment strategies, they have two different investment objectives. Also we can see why one is trading at its yearly lows and the other one is in the middle of its yearly trading range. There is a big difference in return for investors.

If you feel that you have to own gold, then you must know what you are buying. Do you homework to find the investment vehicles that are in line with your investment objectives instead of listening to others and following blindly.

YES, it takes work to protect your hard-earned money in bull markets AND bear markets. As a bonus, we will take a quick look at the top three positions of FSAGX as of June 30, 2008;

Goldcorp Inc. (GG)

Daily Chart with 50- and 200-day Moving Average