It's no news that gold has been one of the hottestinvestments in
the past decade. With the dollar on a steady decline, gold has
gained more than 500% in the past 12 years, crushing the S&P
500's paltry 12% return. Take a look at the meteoric gains below.
Anyone who's invested in the yellow metal has made alot ofmoney
And the trends that have been driving gold higher in the past 12
years are still well in play.
The U.S. dollar continues to depreciate under heavy stimulation
from the Federal Reserve and lingering trade deficits. And the
world still views gold as a safe haven againstinflation and social
instability, with political events in Europe and the Middle East
fueling more demand.
But owning bullion is unrealistic for most investors. Not only
is it incredibly difficult and dangerous to store bullion, but it's
also capital-intensive at $1,650 an ounce.
That's why many investors, including former Texas congressman
Ron Paul, are focusing on gold-miningstocks .
Revealed: An Inside Look at Ron Paul's Portfolio
Problem is, miners have performed poorly in the past two years,
as they are vulnerable to the whims of thestock market more than
underlying gold prices, leaving most investors with big losses as
you can see in the chart below...
As you can see, although precious metals keep jumping higher
each year,investing in gold isn't as easy as it looks.
That's why I am such a fan of an exchange-tradednote (
) that lets investors buy gold at a 50% discount.
PowerShares DB Gold Long ETN (
seeks to replicate, net of expenses, twice the daily performance of
the Deutsche BankLiquid Commodity index - OptimumYield GoldExcess
Return . The key feature of this note is its use of 100%leverage ,
essentially reducing investors' out-of-pocket cost to invest in
gold by 50%.
But the fact that this is a leveragedinvestment doesn'tmean
investors are at risk oftracking errors and unwanted volatility,
which are a few factors that have plagued the leveraged
exchange-tradedfund and ETN space.
PowerShares DB Gold has an excellent track-record because
contract spreads in gold are relatively tight. There isn't as
muchcontango between front- and back-month contracts, creating less
price slippage whenfunds roll to front months.
The second factor driving this ETN's tracking accuracy is the
decision by Invesco PowerShares Capital Management to link it to a
special goldindex designed to decrease price discrepancies between
roll months. The index is called "Optimum Yield" because it rolls
to the contract with the best implied roll yield. It also includes
the theoretical return of Treasury bills that would be held in
amargin account .
Beyond its use of leverage and unique tracking strategy, DGP
only trades for a little more than $50. This gives investors much
more flexibility with strategic decisions about allocating capital
into precious metals.
Buying DGP also requires no storage, just a simple brokerage
account to execute a transaction. Hauling gold between different
vendors and then trying to find adequate storage is expensive and
Cash-for-gold dealers also frequently buy and sell a few
percentage points above or below market prices, gouging their
customers with a lightly-veiled transaction cost. Transaction fees
at discount brokerage firms to buy and sell stocks have never been
lower, making the cost of buying or selling an ETN virtually
inconsequential in a highly liquid and transparent market.
All of these benefits have made DGP a popular destination for
investors who are looking to cash in on thebullish trend in
gold. With assets under management of $450 million, DGP is one
of the biggest and most successful ETNs in the market. It
outperformed the S&P 500 during each of its first three years
in existence from 2008 to 2011 before closing neutral in 2012.
The average daily tradingvolume of 250,000 provides plenty
ofliquidity for even big institutional investors.
DBG also looks like a great deal, with anexpense ratio of 0.75%,
safely below its category average of about 1%.
Risks to Consider:
This is an unsecured financial instrument offered through
Deutsche Bank. If Deutsch goes bankrupt, like the Lehman Brothers,
then investors lose everything. By using leverage, investors also
increase their risk as a percentage of invested capital.
Action to Take -->
Investing in DBG is a great way for investors to beef up their
precious metal holdings while cutting their out-of-pocket cost by
50%, essentially buying gold for half the price. With gold being on
a 12-yearbull run and with projections for this trend to continue,
this is not an opportunity investors should pass.
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