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Gold mutual funds are just one of several ways that individuals can invest in gold. This topic was thoroughly discussed in our article, appropriately named, Investing in Gold. In that publication we outlined eight different ways to buy gold, and mutual funds is an excellent choice if you're considering entering the market.
Gold Mutual Funds and Stock Market Risks
One of the big advantages of mutual funds is their ability to reduce individual stock risk. There are two kinds of risk associated with common stocks: market risk and individual stock risk. Market risk has to do with the economy or industry itself. For example, rising interest rates can have an adverse effect on the stock market by increasing the cost to borrow money.
In the case of gold, industry risk has more to do with laws pertaining to the mining of land or the market price of gold itself. As the price of gold rises, the entire gold mining industry should experience a lift in stock prices.
Individual Stock Risk
There is a second risk that investors need to be concerned with: individual company risk. This is the risk that a company can under-perform due to poor management decisions, lawsuits, or other events that can materially impact the earnings of that company. Since mutual funds are a collection of stocks, they allow the investor to instantly create a portfolio without purchasing a diverse set of stocks. Holding a portfolio of stocks allows the investor to mitigate the risk associated with an individual stock.
Investors recognize the benefits associated with mutual funds, and their growing popularity has led to a wide range of specialized funds such as gold mutual funds. These are portfolios of precious metal mining companies that have operations that include gold mining.
World Gold Production
In 2009, the total mine production in the world was around 2,600 tonnes of gold. This might sound like a lot of gold, but this production is barely keeping pace with the use of gold. The leading producer countries were China (11.8%), Australia (8.6), the United States (8.1%), South Africa (7.7%), and Russia (7.7). Approximately 11% of all the gold mined each year is used to satisfy dental, medical, and electronics needs.
Buying Gold as an Asset
Gold, and other precious metals, are assets that offer investors the benefit of being both tangible (something that can be held) and liquid (easy to convert into currency). Most investors that buy gold never take physical possession of the material itself. Instead, it is usually held for them by a bank, mutual fund, or an exchange traded fund.
Gold as a Hedge Against Inflation
At one time, financial professionals recommended holding gold to diversify one's portfolio. Today, that strategy no longer holds true. Most investors buy gold as a hedge against inflation or other macro-economic / political factors that affect other investments negatively. For example, when macroeconomic factors push down the price of stocks, the value of gold usually increases.
Gold as a Currency Hedge
Other investors believe that gold is a natural hedge against currency movements. For example, if an investor believes the value of the dollar will decline relative to other world currencies, then buying gold can help to insulate the investor from the decline in the dollar's value.
This is true because as the dollar declines relative to other currencies, the value of gold remains constant. This means it will take more dollars to buy the same amount of gold. Therefore, the price of gold (stated in dollars) will start to rise.
Gold Exchange Traded Funds
Buying gold EFTs is another easy way for the investor to move money into gold without taking physical possession. As explained in our article on exchange traded funds, there is usually a brokerage commission associated with the purchase of the gold EFT, and a charge for storing the gold itself.
The first gold exchange traded fund was Gold Bullion Securities (GOLD), which appeared in March 2003 on the Australian Stock Exchange. Today, the investor can find gold exchange traded funds, also known as GETFs, on many of the major stock exchanges. This includes the London Stock Exchange as well as the NYSE.
Precious Metals Funds
Gold mutual funds can sometimes be found when researching specialty funds. They are also included with precious metal funds. The investor is offered additional diversification, and insulation from single metal price fluctuations, when gold is included with other precious metals such as silver or platinum.
If we take a closer look at this sector and the Morningstar ratings of precious metals mutual funds, the top performing funds in this class over the past three years (in terms of total return, and as of April 2011) include:
- Van Eck Intl Investors Gold (INIIX): 22.14%
- Tocqueville Gold (TGLDX): 21.64%
- Van Eck Intl Investors Gold (INIVX): 16.15%
- Oppenheimer Gold & Specialty (OPGSX): 14.38%
- First Eagle Gold I (FEGIX): 14.22
Keep in mind that past performance holds no promise of future returns. It's important to conduct thorough research before investing. If you are thinking about investing in gold, or any other mutual fund, then you might want to take a quick look at our article: Investing in Mutual Funds.
About the Author - Gold Mutual Funds
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