It seems like almost every analyst with even a small interest in
gold is on the GLD bandwagon. The exchange traded fund introduced
by State Street Global Advisors in November of 2004 has so much
popular appeal and media coverage that you'd think it was the only
way to invest in gold.
The idea is, every share of GLD represents 1/10 of an ounce of real
gold that the ETF's custodians keep in a vault in London. No, you
can't visit your gold, nor can you have them ship it to you.
Indeed, there's no way the gold in their vault will ever end up in
your hands - but they do have daily and weekly updates about how
much gold they have, and how much they've bought and sold. To date,
they hold more than 1232 metric tons of gold bullion, worth more
than $68 billion.
So why do I think it's boring?
As someone who personally owns physical gold, I can't understand
why gold investors would be interested in owning GLD. It offers
none of the benefits of owning physical gold, and none of the
upside of buying a gold security.
Having physical gold in your possession is a security blanket; it
protects your bottom dollars from the eventuality of a currency
crisis. But having it in a vault in London won't do you any good in
Buying a gold security, like a junior miner, explorer, royalty
trust or refiner gives you the potential to multiply gains made in
the price of gold. But GLD only barely keeps pace. It will never
multiply gains made in gold unless you want to trade GLD options.
Okay, so it's not a total bust. GLD has ridiculously low fees, so
any gains made in the yellow metal are almost entirely passed onto
the ETF shareholders. And unlike holding the physical metal, there
are no transaction costs outside of what your broker charges you to
And I can see how regular investors might want to get a little
exposure to gold as a hedge in their portfolio.
But if you're a true believer that gold is headed for much higher
numbers, it doesn't make much sense to hold GLD.
Furthermore, if you want to get rich from gold, the physical bars
and coins won't ever do that for you. Physical gold is great as a
store of value. That's all. The best we can realistically hope for
is that it will stay one step ahead of inflation, and protect our
principle. Physical gold has never, ever paid a dividend. There's
no compound interest. No cash-flow.
If you want to get rich, you have to stick your neck out a little
and buy stock in small gold companies. It's said that only one gold
venture in a thousand will ever get any gold out of the ground - so
it's vitally important to buy the best of breed. A junior gold
company that can actually mine gold and bring it to market can
multiply gold's gains many times over.
Unfortunately, most junior gold companies go belly up. And even
worse: most of the geologists and marketers in the junior gold
business are glorified con-artists. They might not have any gold at
all, but they hope they can bump up the share price and sell their
shares for a huge payday. Or they'll hope to cherry pick some
drilling results and sell their stake to a bigger mining outfit
before anyone's the wiser. Mark Twain famously said, "A gold mine
is a hole in the ground with a liar standing next to it."
So, how can you tell who is the real deal, and who is another
charlatan next to a pile of dirt? Well, the best way to separate
the wheat from the chaff is to find a small company that's actually
producing already. A firm that's beyond exploratory or drilling
phases. You basically want to find a small company that's already
proven it has gold by getting that gold out of the ground - and you
want some obvious proof that they have lots more gold left.
As I spoke about several days ago, one of my favorite ways to play
gold right now is the
Market Vectors Gold Miners ETF (
. The ETF offers a simple way to get diversification in the sector,
and you'll save money on transaction fees by buying the ETF instead
of the individual companies, and they actually have a pretty low
annual expense ratio of just and 0.54%.
Also, if your brokerage doesn't let you buy shares on Canadian,
Australian or other foreign exchanges, the ETF has a good mix of
companies from those countries.
I'd consider averaging into the ETF as long as gold is falling.
When it resumes the uptrend, I think GDXJ will quickly correct to
the upside - so don't try to time any tops or bottoms. Average in
over the next few days or weeks and you'll make out like a bandit
A Gold Correction is Coming
Why Rebels Buy Gold and Silver
A Value Investor's Gold Stock Shopping List