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By Dr. Steve Sjuggerud, Advisory Panelist, Investment U Tuesday, November 11, 2003: Issue #288
Gold stocks are up 489% in the last three years.
I find that number hard to believe. But it s absolutely true. And I m not cherry-picking a few good ones for this gold stock report This is referring to the entire gold mining index (the Gold BUGS Index), made up of 15 of the world s major gold stocks.
And that 489% moon shot is just one indicator of gold s shining performance in recent years to say nothing of its even brighter future.
Take a look at these nuggets The price of gold itself is up over 50% from its lows in 1999 Graded gold coins are up 70% in the last three years, and Futures and options on gold have soared Who knows how many thousands of percent you d have made by investing in gold? You d have stopped counting, and you d be on a beach somewhere in the Caribbean about now
Today we ll look at some of the other major factors that make gold a great investment right now plus examine some specific ways that we as investors can best take advantage of the situation and invest in gold. Let s get started
Gold Stock Report 6 Reasons to Invest in Gold
1. It s super cheap. Gold is cheap, while stocks are expensive. In January of 1980, both the Dow Industrials and the price of gold were at the same level: 800. Now, nearly 24 years later, the Dow is near
10,000, while gold is less than half its January 1980 value. There are some great opportunities in gold stock, as we ll report below.
2. Governments will make our money worth less to pay off their record debts. Governments can print money to pay off their debts. But they can t create gold. The supply of paper money can be infinite. But the supply of gold is extremely?limited (they say that the entire gold production in the history of the world could fit on the basketball court at Madison Square Garden). And it s difficult to extract. Bill Gates could buy all the gold mined in the world in a year from his checkbook.
3. Gold should do well in major international conflicts. The price of gold was fixed during World War I and World War II. But silver, for example, rose by over 100% in both world wars. It s been rising for the duration of the War on Terrorism. It all comes back to #2, above governments ultimately print money to pay for wars.
4. Gold should do well in extreme bear markets. Silver more than doubled in value from 1932 to 1936 during the Great Depression (the price of gold was fixed by the government). The next long bear market was 1968-1980. Silver rose from around $2 in 1968 to a peak near $50 in 1980.
5. Gold stock will rise during inflation and during deflation. Investing in gold is good inflation protection gold rises as the value of the dollar falls. But what many people don t understand is that gold stocks will do even better during deflation, as the government lowers interest rates significantly and wildly prints money (creating inflation) to offset that deflation leading to substantially higher gold prices. This is where we are now, and gold has done what it s supposed to do.
6. When you buy gold investments, you lower?risk in your investment portfolio. In the past, gold has tended to do the opposite of stock sit skyrocketed in the 1970s, when stocks did horribly. Then in the 1980s and 1990s, when stocks soared, gold lost over half its value. Now in the new millennium gold has soared while stocks are still below their year 2000 highs. Holding a portion of your portfolio in gold stock will smooth out your portfolio fluctuations.
6 of the Best Ways to Invest In Gold
You can make 500% in gold stocks, or 50% in raw gold. You can even make thousands of percent in futures and options-or you can lose it all. Let s cover the various gold investing options, and the risks and rewards associated with each, starting with the most risky
1. Futures and options on gold Yes you can make thousands of percent in these in a gold bull market. And yes you can lose all your money, and then some (in the case of futures). While I don t recommend this route (so I won t discuss it further), if you re interested in pursuing it, someone we trust that has been doing it for 20 years and provides excellent personalized service is Sue Rutsen (www.suerutsen.com, 800-345-7026).
2. Junior mining stocks (exploration companies)
Phew these are much too risky for my blood as well. They say only one in 10,000 exploration companies will find a mine and bring it into production. For the lucky one that s found, the average cost of finding and developing a gold mine in Canada, for example, is $100 million (figures from the book BreX by Diane Francis). The cards are stacked against you in the junior mining stocks, so I generally avoid them. But they can and do rise many hundreds of percent in a gold bull market. How lucky are you feeling?
3. Blue chip mining stocks
I m finally comfortable here with blue chip mining stocks. These are cash-creating businesses. They generally have many mines operating, generating cash earnings. They plow those cash earnings back into the business by buying out junior mining companies that have made a discovery. Why bother doing the exploration yourself? Just buy the juniors after a discovery. That s basically what they do. These include names like Newmont (NEM) and Barrick (ABX).
4. Gold stock mutual funds
This is probably your smartest and best way to invest in gold. Chances are, you re not an expert in analyzing assay results. That s okay. Guys like Frank Holmes at U.S. Global funds (www.usfunds.com) know how to find the winners. His World Precious Minerals Fund is up 68%, and his Global Resources
Fund is up 75% year-to-date-the best performer in its sector by far. Learn more about Frank s three different funds with gold exposure at www.usfunds.com.
5. Investment grade rare coins
I consider these to be the best opportunity right now. While gold stocks are up nearly 500%, investment grade gold coins (those that carry a grading of Mint State (MS) 63 or higher from the grading agencies PCGS or NGC) are only up 70%. These coins peaked in value in 1989. They subsequently fell by 85%, bottoming in 2001. There is still 100% upside on the table here, and your downside is limited (since you re close to meltdown value). I prefer the least expensive of these with the highest gold content, like the $20 Saint Gaudens. For your safety, stick with the Oxford Club s recommended coin dealers (see the OC website, www.oxfordclub.com).
6. Raw gold (bullion or bars)
To own gold directly, you can buy common gold coins or small bars of gold. Common gold coins are known as bullion coins. These include popular coins like Krugerrands or Canadian Maple Leafs, and they cost just a few dollars more than the current price of gold. These don t have extraordinary upside or downside they simply move with the price of gold. But after the huge run-up in mining shares, you may prefer to have the limited downside risk of these. Michael Checkan at Asset Strategies (www.assetstrategies.com 800-831-0007) is a specialist we trust in owning raw gold.
Sold on Gold? Here s How To Learn More about the Best Way To Invest in Gold
Let me share two books and two web sites I particularly like: The World Gold Council has a lot of excellent resources (see the Crib Sheet, below). For financial information, charts, news and more, Kitco is?fantastic. I visit its?Web site?almost every day (again, see the Crib Sheet below for specifics).
As for gold books, there isn t much out there that s good (most of it is gloom and doom stuff ). However, if you re considering buying coins, I highly recommend Coin Collecting for Dummies by Ron Guth, so you can learn all the lingo and avoid the common mistakes. I really enjoyed the book The Power of Gold: The History of an Obsession by Peter Bernstein. It never tells you what to buy; it s more like a fascinating gold history book told in story form.
That about covers it.
Yes, you should invest in gold to some extent, even if it is purely to lower some of the risk in your investment portfolio, as gold and stocks often go in opposite directions. If you re not there right now, it s time make the move.
Today s Investment U Cribsheet The World Gold Council s web site is very useful (www.gold.org), offering all kinds of free resources that can prove valuable to the gold-investing neophyte. The gold web site I probably visit most often is Kitco s, at www.kitco.com. To check out The Power of Gold: The History of an Obsession, by Peter Bernstein, you can visit Amazon. Or, follow the link for more info on Ron Guth s Coin Collecting for Dummies. More on this topic (What's this?) Barron's: "Barely out of beta testing, Wikinvest's Portfolio tracker is already the most advanced portfolio manager online." How Jim Rogers Invests In Gold (Learn Mining News, 7/14/10) Don t Buy These Gold Stocks (Learn Mining News, 7/2/10) One of the Most Bullish Indicators on Gold I ve Seen (Red Hot Energy and Gold - Global..., 6/7/10) Read more on Gold at Wikinvest
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