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 Gold mutual funds is just one of several ways that individuals can invest in gold that we discussed in our article - appropriately named - Investing in Gold. In that article we talked about eight different ways to buy gold, and gold mutual funds are an excellent choice if you considering entering the market.
Gold Mutual Funds and Stock Market Risks
Mutual funds offer the investor the ability to reduce individual stock risk. Remember, there are two kinds of risks that come along with common stocks - market risks and individual stock risks. Market risks have more to do with the economy or industry itself. For example, rising interest rates can have an adverse affect 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
But there is a second risk that investors need to be concerned with - individual company risk. This is the risk that any 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 portfolios of stocks, they allow the investor to instantly create a portfolio without having to purchase a diverse set of stocks.
Many 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 2005, the total mine production in the world was around 2,500 tonnes of gold. Now 2,500 tonnes of gold might sound like a lot of gold, but this production is barely keeping pace with the use of gold. The leading producer countries were South Africa (12%), the United States (10%), Australia (10%), Latin America (10%) and China (9%). Around 11% of all the gold mined in each year is used for dental, medical and electronics.
Buying Gold as an Asset
Gold and other precious metals are assets that offer investors the benefits 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 most 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 and 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 having to take 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 including the London Stock Exchange, the NYSE.
Precious Metals Funds
Gold mutual funds can sometimes be found during your research as specialty funds or are included with precious metal funds. The investor is offered additional diversification and insulation from the single metal fluctuations when gold is included with other precious metals such as silver or platinum producing companies.
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 November 2007) include:
- Midas (MIDSX) - 37.32%
- Vanguard Precious Metals and Mining (VGPMX) - 36.57%
- USAA Precious Metals and Minerals (USAGX) - 32.65%
- U.S. Global Investors World Precious Minerals (UNWPX) - 35.62%
- Van Eck Intl Investors Gold A (INIVX) - 33.74%
Just remember that past performance holds no promise of future returns. You should always do your research before investing. If you are thinking about investing in a gold or any other mutual fund, you might want to take a quick look at our article on Investing in Mutual Funds.
About the Author - Gold Mutual Funds
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