One of My Favorite Ways to Play Gold Right Now

SmallCapInvestor.com


It seems like almost every analyst with even a small interest in gold is on the GLD bandwagon. The exchange traded fund introduced by State Street Global Advisors in November of 2004 has so much popular appeal and media coverage that you'd think it was the only way to invest in gold.

The idea is, every share of GLD represents 1/10 of an ounce of real gold that the ETF's custodians keep in a vault in London. No, you can't visit your gold, nor can you have them ship it to you. Indeed, there's no way the gold in their vault will ever end up in your hands - but they do have daily and weekly updates about how much gold they have, and how much they've bought and sold. To date, they hold more than 1232 metric tons of gold bullion, worth more than $68 billion.

So why do I think it's boring?

As someone who personally owns physical gold, I can't understand why gold investors would be interested in owning GLD. It offers none of the benefits of owning physical gold, and none of the upside of buying a gold security.

Having physical gold in your possession is a security blanket; it protects your bottom dollars from the eventuality of a currency crisis. But having it in a vault in London won't do you any good in that event.

Buying a gold security, like a junior miner, explorer, royalty trust or refiner gives you the potential to multiply gains made in the price of gold. But GLD only barely keeps pace. It will never multiply gains made in gold unless you want to trade GLD options.

Okay, so it's not a total bust. GLD has ridiculously low fees, so any gains made in the yellow metal are almost entirely passed onto the ETF shareholders. And unlike holding the physical metal, there are no transaction costs outside of what your broker charges you to buy shares.

And I can see how regular investors might want to get a little exposure to gold as a hedge in their portfolio.

But if you're a true believer that gold is headed for much higher numbers, it doesn't make much sense to hold GLD.

Furthermore, if you want to get rich from gold, the physical bars and coins won't ever do that for you. Physical gold is great as a store of value. That's all. The best we can realistically hope for is that it will stay one step ahead of inflation, and protect our principle. Physical gold has never, ever paid a dividend. There's no compound interest. No cash-flow.

If you want to get rich, you have to stick your neck out a little and buy stock in small gold companies. It's said that only one gold venture in a thousand will ever get any gold out of the ground - so it's vitally important to buy the best of breed. A junior gold company that can actually mine gold and bring it to market can multiply gold's gains many times over.

Unfortunately, most junior gold companies go belly up. And even worse: most of the geologists and marketers in the junior gold business are glorified con-artists. They might not have any gold at all, but they hope they can bump up the share price and sell their shares for a huge payday. Or they'll hope to cherry pick some drilling results and sell their stake to a bigger mining outfit before anyone's the wiser. Mark Twain famously said, "A gold mine is a hole in the ground with a liar standing next to it."

So, how can you tell who is the real deal, and who is another charlatan next to a pile of dirt? Well, the best way to separate the wheat from the chaff is to find a small company that's actually producing already. A firm that's beyond exploratory or drilling phases. You basically want to find a small company that's already proven it has gold by getting that gold out of the ground - and you want some obvious proof that they have lots more gold left.

As I spoke about several days ago, one of my favorite ways to play gold right now is the Market Vectors Gold Miners ETF (NYSE:GDXJ - News). The ETF offers a simple way to get diversification in the sector, and you'll save money on transaction fees by buying the ETF instead of the individual companies, and they actually have a pretty low annual expense ratio of just and 0.54%.

Also, if your brokerage doesn't let you buy shares on Canadian, Australian or other foreign exchanges, the ETF has a good mix of companies from those countries.

I'd consider averaging into the ETF as long as gold is falling. When it resumes the uptrend, I think GDXJ will quickly correct to the upside - so don't try to time any tops or bottoms. Average in over the next few days or weeks and you'll make out like a bandit

Related Articles:

A Gold Correction is Coming

Why Rebels Buy Gold and Silver

A Value Investor's Gold Stock Shopping List

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