Saturday, December 21, 2013

Investing In Gold

Gold has been on a 13 year rally dating back to 2001 when it was trading at 271.04.  It currently trades at $1202.80 the troy ounce.  This may be the first time in 13 years where gold closes the year at a loss.  Investors like to have some exposure to gold as a hedge or just to diversify their portfolio with one of the most popular commodities worldwide.  During an economic crisis gold seems to be even more popular that pretty much explains the ascent of the commodity from $695 in 2007 to $1917 an ounce in August 2011.

As an investor or someone trying to make some profits there are a few ways to invest in the precious metal.  The most obvious way is through the purchase of gold bars, jewelry or gold coins. Your best bet is to buy the gold bars and store them in a safe box at a bank.  You can also invest in gold without actually purchasing the physical commodity but instead you can buy the futures contract on Comex this will give you the same exposure to the actual price of the commodity which currently trades at $1202.80 (GCG14.CMX).  You can also buy gold through your 401k or through a mutual fund.

An investor can also invest in gold exchange-traded products that aim to track the price of gold and are traded on the major stock exchanges such as London, Mumbai, Zurich and New York.  These products include close-end funds CEFs, exchange-traded notes ETNs and exchange-traded funds ETFs.  The most popular exchange-traded product is the ETF which is an investment fund traded on stock exchanges just like stocks.  It can hold commodities such as gold and silver.  Investors like them primarily due to their low costs.  A popular gold ETF is the SPDR Gold Shares (GLD).

Another way to have exposure to gold is through an index such as the Philadelphia Gold and Silver index (^XAU) which trades on Nasdaq the index is made up of different companies that mine/produce gold and silver. You can also pick one of the gold mining stocks from the index and invest in that company such as Goldcorp Inc. (GG).

If an investor wants to fully invest in gold I would suggest to invest in the actual physical commodity either through gold bars or a futures contract.  Any other investment may be easier and less expensive but it will not move 100% in congruence with the price of gold.  Since the financial crisis started in 2008 gold stocks did not rise in value as much as the actual commodity.  When a recession as severe as the one we just lived through hits, people want the physical commodity not a stock.  This year gold prices have dropped about 25% yet gold companies have lost about 50% of their value.  That is why I prefer to go for the actual commodity I bought gold back in 1998 when it wasn't hot came very close to buying at the 1999 low.  I was just a kid back then I wish I would've had more money but I did buy some more in late 2007.

Whether you pick the physical stuff or a mining stock you risk buying high and waiting a lifetime to get your money back or if you buy a futures contract you may get stuck accepting physical delivery of the commodity or with a monetary loss from trading.  The declining prices may be a signal to buy especially for mining stocks yet prices may continue to fall.  The economy is improving which may lead investors to drop gold and move onto other investments.  Buy gold now at your own risk or wait for prices to drop even lower to enter.  As for me I like to buy when no one is interested as I did in 98.  At this point the prices are a bit too high for me and I would invest a very small amount of money if at all.  I believe there are better investment opportunities out there.

Wednesday, December 11, 2013

How To Manage Your Money

Growing up I had no clue how to go about spreading out my hard earned money.  I went to several networking events to look for answers.  Some professionals offered no help and some would only help me if I had a certain amount of money.  In the end I decided to figure it out on my own. There isn't a universal answer and what may be a good investment today may be a bad one a few years down the road.

What should you be looking for when allocating your money?

You first need to take care of your basic needs and then set aside some money for emergencies once that is taken care of you need to think where you will place your savings.  Money that may be lost or money that you may not be able to touch for a while.  We all differ in the way we view risk whether you are a risk taker or a bit averse you need to know our current interest rate which has stayed at 0.25% for several years now.  This is why CD rates have dropped dramatically if the interest rate which banks charge each other to lend money has gone down then all interest to lenders will go down as well.  When you buy a CD you are basically lending the bank money for a period of time.  During 2008 rates were dropping your best bet would have been to have locked in your 2007 rates for at least a year or two.  Even if you had kept them for 4 years you should have not locked in all your money as the stock market was dropping and come 2009 you should have had a good amount of money in liquid form to buy stocks at a bargain.

By 2010-11 you would have more than doubled your money had you left it in stocks.  Had you bought more in 2011 you would have doubled your money once again in 2013.  Had you chosen to buy a CD in 2010 you would have not made any returns.  Then again you wouldn't have lost much as inflation stayed very low during the recession.

That brings us to the second indicator you should be looking out for: inflation.  Inflation will destroy the value of your money in the long run.  If interest rates are low you will have a hard time finding good returns.  Since inflation is currently low you can settle for returns that are not as high as long as you are staying above inflation.  The ideal would be to risk big and get 7% returns in a low interest rate low inflation environment but not everybody has the stomach to handle the stock market volatility.  This is when you start deciding how much of your money will go to stocks.  If you are young you should be putting a good amount of money into securities.  I like to do my own investing and go big but it is ok if you take small steps at first.

Stocks and CDs are not always the answer back in the 1980's inflation and interest rates got out of hand real estate or gold would have been a better choice.

The 10 Yr Bond is currently at 2.8440 which is higher than the 0.25% interest rate and higher than our 1% inflation rate yet this is not where I would place my money.  Ten years is a long time and at some point inflation should average higher than 2.84% and we also need to consider that when interest rates go up bond prices go down.  At this point interest rates have no other way to go but up making bonds not desirable.  As a financially educated investor you have to know what to look for and when to take action the signs may not always be clear but taking risk and educated guesses is the name of the game.