In an earlier article, we discussed eight different ways investors could participate in the gold market. Here we're going to talk about one of the easiest ways for investors to enter the market: gold mutual funds.
There are two kinds of risks associated with common stocks: market risk and individual stock risk. Market risk is on a macroeconomic scale. For example, interest rates could rise rapidly and the entire stock market takes a downturn. This kind of risk can also occur at an industry level. In the case of gold, the laws pertaining to the mining of land or the market price of gold itself can affect the entire industry. As the price of gold rises, all gold mining companies should experience an increase in their stock price.
There is a second risk that investors need to be concerned with: individual company risk. This is the risk that a company will underperform 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 securities. Holding a portfolio of stocks allows the investor to mitigate the risk associated with an individual company.
Investors recognize the benefits associated with mutual funds, and their growing popularity has led to a wide range of specialty offerings such as gold mutual funds. These are portfolios of precious metal mining companies that have operations that include gold mining.
In 2017, the total mine production in the world was around 3,150 tons according to the U.S. Geological Survey. The leading producer countries were China (14.0%), Australia (9.5%), Russia (8.1%), the United States (7.8%) and Canada (5.7%). Approximately 38% of all the gold mined each year is used to satisfy dental, medical, and electronics needs.
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). Investors that buy gold normally 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.
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 macroeconomic / political factors that affect other investments negatively. For example, when macroeconomic factors push down the price of stocks, the value of gold usually increases.
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, they will buy gold to insulate themself from the decline in the dollar's value.
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.
Buying an exchange traded fund, or ETF, 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 ETF, and a charge for storing the metal.
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 EuroNext.
Gold mutual funds can oftentimes be found when researching specialty offerings, and are typically 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.
Taking a closer look at this sector and the ratings of precious metals mutual funds, the top performing funds in this class over the past year (in terms of total return, and as of September 2018) include:
|Fund Name||Ticker||1 Yr. Return|
|Deutsche Gold & Precious Metals B||SGDBX||22.68%|
|Deutsche Gold & Precious Metals S||SCGDX||3.77%|
|Deutsche Gold & Precious Metals Instl||SGDIX||3.77%|
|Deutsche Gold & Precious Metals A||SGDAX||3.65%|
|Invesco Gold & Precious Metals B||IGDBX||3.08%|
|Deutsche Gold & Precious Metals C||SGDCX||3.02%|
|Fidelity Advisor® Gold B||FGDBX||0.00%|
|Wells Fargo Precious Metals B||EKWBX||-0.46%|
|Oppenheimer Gold & Special Minerals B||OGMBX||-6.65%|
|Gold Bullion Strategy Investor||QGLDX||-10.61%|
Keep in mind that past performance holds no promise of future returns. It's important to conduct thorough research before investing. Anyone thinking about investing in gold, or any other mutual fund, should take a quick look at our article: Investing in Mutual Funds.
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