Recently, a client explained to me how he thought gold was a good investment and protection against inflation. I’m not going to talk today about if he is right or wrong. Instead, I’ll mention that his fabulous do it yourself investment solution was Fidelity’s Gold Fund.
Gold Mutual Fund Holdings
Well, it came as quite a shock to him that actual gold is only the sixth biggest investment in the fund. Five bigger investments in the mutual fund are in companies that have something to do with the gold industry. Granted, those company’s stock prices will be heavily influenced by the price of gold, but certainly not on a one-for-one basis, and it is very possible for gold companies to have problems (and thus lower stock prices) unrelated to gold prices.
Gold companies are very susceptible to environmental lawsuits and regulations. Not to mention, gold happens to be mined in some very unstable countries throughout the world. A military uprising could drive the price of gold higher as it takes out some of the world’s supply, while at the same time sending a gold mining company’s stock plummeting because that same supply interruption that boosted prices also interrupts that company’s revenue.
Gold Investing or Gold Industry Investing
Taking some comfort in straight gold being the sixth biggest holding? Guess how much that is overall in the fund?
The point is, you have to understand ALL the aspects of what you are investing in. Being right about gold being a good investment is not helpful if the investment you buy isn’t really in gold, but in gold companies. Gold companies CAN be a good way to invest in the gold arena, but it is important to understand the difference between investing in raw gold (bullion) and in gold companies (stock of businesses).
One of the few ways you can invest directly in gold is buying gold coins. Technically, you can buy gold bars, but when gold goes for $1,000 to $2,000 per ounce, a gold bar represents a significant investment.
Of course, when you buy gold bullion coins, or gold bullion bars or ingots, you have to store and protect them. You also have to be careful of costs in the form of markup when you buy, and how far away from the spot price you can sell.
Don’t make this same mistake. If you think something is a good idea, research everything, or run it by someone who is a professional. Either way, you’ll make sure the investment you get is the investment you want.