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Best Ways to Invest in Gold

NEW YORK (MainStreet) —Investing in gold is not for the faint of heart. The beating the precious metal has experienced so far this spring has left it trading at prices that are more than 20% below its 2011 high. It is difficult to predict whether the bottom is in or more bloodletting is in store, but some individual investors may be looking to add gold exposure at this time. If you find yourself in this camp, here are a few of the best ways to go about it.

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Exchange Traded Funds

If you want an inexpensive way to purchase a security that will track the price of gold, exchange traded funds (ETFs) such as the SPDR Gold Shares (GLD) or the iShares Gold Trust (IAU) are worthy of your attention. “Instead of hoarding gold coins or taking on gold miner exposure, investors can directly invest in gold price movements through physically backed gold ETFs,” said Tom Lydon, president of Global Trends Investments. “The gold ETFs store physical gold bars in European vaults, so each gold ETF share represents a fractional ownership of the physical gold stored in the vaults.”

Another ETF for investors to ponder is the Market Vectors Gold Miners ETF (GDX). “GDX provides indirect exposure to gold prices, but will be subject to regional and company specific problems such as management and regional strikes,” Lydon said. “Gold miners are currently trading at very attractive valuations, but have been one of the most hated sectors as gold producers have not mirrored the rally in gold prices over the past few years.”

Active Management

Peter Sorrentino, a senior portfolio manager for Huntington Asset Advisors, favors the use of mutual funds over ETFs for investing in gold due in part to the active management of fund managers. However, he does acknowledge that ETFs are a viable option. “One avenue I recommend to customers who want to go that route is the Central Fund of Canada (CEF),” he said. “Every day they post what their current holdings are of gold and silver and customers can see the discount or premium to the market value.”

Mr. Sorrentino manages the Huntington Real Strategies Fund (HRSTX), which has a focus on an array of commodities. “The fund has exposure to hard assets across the board,” he said. “It has had varying levels of gold and silver exposure since its inception in 2007. We had taken it down somewhat given the fact that the metal had really not drawn any attention for over a year. With the recent sell-off we’ve actually been building our gold exposure back up again.”

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Staying Liquid

An important consideration to keep in mind for investors looking to buy gold is liquidity. “If somebody wants gold access, the best way to do it is through a fund that buys gold futures or an ETF that buys gold futures,” said Stephen Hammers, chief investment officer at Compass EMP Funds. “The futures contracts allow investors to stay liquid and they are not going to be paying dearly if they want to sell.”

For investors that decide to use a mutual fund, Hammers recommends a careful review of the fund’s asset allocation. “The problem with a lot of commodity funds is that a lot are production weighted and they are not going to have a lot of gold -- they are going to have significantly more oil,” he said. “Our Compass EMP Commodity Strategies Volatility Weighted Fund (CCOIX) follows the CEMP Commodity Volatility Weighted Index, which means you are going to have more precious metals because all of the commodities are weighted based on their risk.”

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