Gold Forecast To Rise; Buyers Have Multiple Investment Options

Editor's Note: Prices for many precious and base metals hit record highs in 2010, as economic uncertainty rattled around the globe. What does 2011 hold for gold, silver, platinum, palladium, copper and other metals? Kitco News reporters have prepared a series of stories which examine what is in store for 2011, not only for metals but for currencies, stocks and the overall economy. These stories will be posted on during the holiday period and also will be featured in a special section. Stay tuned for video highlights as well.

(Kitco News) - The 2011 gold outlook from most analysts, simply put, is higher.

But for new investors wanting to join the gold rush, there is still some homework to do. They might want to familiarize themselves with the many ways in which they can invest--from coins to exchange-traded funds to mining stocks--to decide which are most suited for them.

Gold has been in a decade-long bull market, rising from roughly $250 an ounce to a recent record of $1,431. Many look for still more gains. BNP Paribas has forecast an average of $1,500 in 2011, while Goldman Sachs has a 12-month target of $1,690 (but also cautioned that gold could peak in 2012).

Gold is likely to benefit as the U.S. dollar loses purchasing power due to factors such as spending deficits and a rising debt load, said Jeff Clark, senior precious metals analyst with Casey Research and editor of its Big Gold newsletter. "Gold is priced in U.S. dollars. So as the dollar loses value, gold must go up almost by default."

The metal has been viewed as the "ultimate currency," often rising even on days when the dollar strengthens, said Bill O'Neill, one of the principals with LOGIC Advisers. This frequently occurs when European debt concerns rattle investors.

"There is no great desire from large investors in particular to hold any currency," said O'Neill, who looks for $1,600 gold next year. Many central banks are adding gold to their reserves, he said. Also, governments and central-bank moves to pump money into the economy have fueled fears of inflation, which supports gold.

Just as investors should diversify overall portfolios, Clark and O'Neill suggested some diversification for the portion in gold, since there are pluses and minuses for each alternative.

Coins Among Easiest Ways To Invest In Gold

"Owning one-ounce coins, especially the popular versions, are the easiest and simplest and perhaps the best protection you can have for what gold is designed to do," Clark said.

Widely recognized bullion coins can be bought and sold readily, O'Neill said. They can also be easily stored someplace such as a safe-deposit box.

Some may prefer bullion bars, which can be cheaper than coins per ounce. However, most investors then take on storage costs. Also, there is the chance potential buyers may question the authenticity. To avoid this, Clark recommended bars stamped by reputable refiners.

Holding physical gold is not risk-free. "One of the issues is security," said Jeffrey Christian, managing director of CPM Group. Risks include theft or a catastrophe that destroys one's home. Investors can purchase a safe or store metal elsewhere, such as a vaulted service or depository.

Such decisions could hinge in part on why an investor buys gold in the first place. Those who fear a complete financial or political apocalypse may want the gold in their possession.

O'Neill cautioned that coin buyers understand the difference between bullion coins, in which the value is based mainly on the gold content, and numismatic coins, in which a higher cost is also based on scarcity, beauty and other factors that increase demand among collectors. Investors can make money on numismatic coins but it takes extra expertise.

Exchange-Traded Products Rapidly Grow In Popularity

A new form of gold investment rapidly grew since its advent in the last decade-ETFs. There are many around the world, but they are largely based on the same concept. Metal is put into storage to back shares that trade like a stock but track the price of the commodity, minus a management fee. This lets investors quickly participate in the market without incurring costs such as assaying, storing or insuring metal.

ETFs let investors buy into the gold market in smaller increments than might be the case for other alternatives, said Bart Melek, global commodity strategist with BMO Capital Markets. Yet, some of the largest hedge funds in the world also use ETFs.

One concern might be if a company holding an ETF's gold should fail, Clark said. Also, in the event of a big price break, there is potential for ETFs to decline at a rapid pace, similar to the futures markets, O'Neill said.

Virtually no ETFs give investors access to physical metal, as they do with coins. "What you're buying with an ETF is exposure to the gold price," Christian said. "There's a big difference."

Futures Markets Offer High Returns But Great Risk

Futures contracts are agreements to buy or sell a commodity at a specified price at a later date.

These markets are highly leveraged, with only 5% to 15% of the total value needed to be put in as collateral. Moves in favor of a trader's positions can make a lot of money, but moves against could mean not only does the trader loses his principal, but he could be responsible for an entire loss.

"If you're not used to trading futures in general, I would tend to shy away from it," O'Neill said."Futures are not for people who are risk-averse."

Mining Stocks Often Move More Than Gold

Analysts say stocks of mining companies often outperform gold in bull markets. For starters, as gold rises, so do company earnings. A producer's stock will fare even better if the company can hike output during high prices.

"Quite a few of them are now paying a dividend, especially senior producers, so you're also getting a yield," Melek said.

However, analysts said, mining shares also tend to fall faster than gold in bear markets.

Gold producer stocks have other risks. Gold might rise, but the company fails to meet production targets due to a strike or flood, or have high mining costs. Depending on location of mines, there might also be a political risk to output.

Clark encouraged diversification within mining stocks. "You can own several companies, or the easy, couch-potato way to do it is to own a (gold) mutual fund."

Gold-Jewelry Investment Value May Vary By Region

In some Far and Middle East nations, denizens buy gold jewelry as an investment just as much as adornment. There tends to be a low mark-up above the value of the gold, in part because of low labor costs there, Melek said.

In the Western world, however, jewelry often has a mark-up well above the value of the gold, meaning most buy it for beauty and to wear rather than make money reselling it.

"You've found people in the last few years who were shocked because they went to sell their gold jewelry and found out the gold content was a third of the value of the jewelry itself," Christian said.

By Allen Sykora of Kitco News;

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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