Your Questions About Invest In Gold Mining Companies

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George asks…

What is the best way to invest in gold?

etf’s, real gold in safety deposit box, gold mining companies? I’m looking for inflation protection.

financi4 answers:

There are a bunch of things to consider (but the answer is ETF’s):

Carrying costs: ETF’s will cost you about 1/2% per year in management fees. You could conceivably pack a safety deposit box with gold and pay less than that. Gold mining companies will not cost you any fees directly.

Tracking gold price: ETF’s and physical gold will track gold exactly. Gold mining companies contain equity risk so they contain risk of how well the company is doing exploring and extracting gold as well as discount rates on future earnings. In terrible inflation, gold and gold ETF’s would almsot certainly outperform gold miners.

Trading Costs: Physical gold trades at a 5% spread or so. ETF’s and big gold mining stocks like Barrick and Newmont trade at much smaller spreads.

Taxes: Earnings on physical gold is taxed at higher rate than ETF’s and gold miining stocks. If you are in the 28% marginal tax bracket or higher physical gold earnings are taxed at twice the rate of ETF’s.

Privacy: If you don’t want someone to know about your holdings, bullion in a safety deposit box is hard to beat.

Leverage: You can make an argument that investing in gold mining stocks can give you a leveraged investment in gold, in that the mining company has debt. It’s hard to buy bullion using leverage. You can also use brokerage margin to buy gold ETF’s and mining stocks at 2:1 leverage. Of course, the winner for leverage is futures contracts which you don’t mention as a possibility.

Short-term trading: If you are going to trade these short term, all three suck because you get short-term capital gains taxation. Futures contracts count 40% of the gains as long term even if you hold them for 5 minutes.

For most real investors – ETF’s are the way to go for direct exposure to gold. Gold stocks are the way to go for a hybrid gold/equity bet. Bullion in a safety deposit box for privacy. Futures contracts for leverage and short-term trading.

Edit: Raylon just inadevrtantly provided you with a really compelling reason to not buy gold. If you took the cash for a really nice suit even 100 years ago and invested it in stocks you would have enough money for 6 nice suits now. If you did it 5000 years ago, you would have hundreds and hundreds of suits. Alas, if you invested it in gold 5000 years ago you would still have that one nice suit.

Advising someone who wants gold as a hedge against inflation to buy commodity futures options is very silly and not professional advice. If you don’t know anything about options, this is just not the way to learn. The poster who suggested that is clearly pleased with himself that he knows what an option is, but the advice is the worst kind of irresponsible. Your likely loss with an option is 100%.

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