| Investing
in Gold & Silver Companies |
Published: November 1, 2005
Gold has never been just an
ordinary metal. In fact, it's one of the rarest metals on Earth --
scientists believe that all of the gold ever mined could fit underneath
Paris' Eiffel tower, forming a cube of just 60 yards on each side.
Gold's rare status has afforded
the yellow metal a unique place in the history of civilization. For at
least the past 6,000 years, through the rise and fall of countless great
empires, man has used gold as a medium of exchange -- a sort of
universal currency. This has been just as true in modern times as in
ancient empires -- the U.S. used gold to back up the dollar until as
recently as 1973, pegging the price of gold at $35 per ounce.
And while the U.S. has been off
the gold standard for more than 30 years now, gold has not lost its
status as a store of wealth. Nor, in fact, has gold lost its reputation
as a hedge against inflation -- a way for investors to protect
themselves against the falling value of the dollar or loss in purchasing
power due to inflation. In times of economic uncertainty or when
inflationary pressures build, investors the world over tend to buy gold
bullion and related gold mining stocks as a hedge.
Of
course, gold isn't the only metal that benefits in periods of economic
strife and inflationary pressure -- silver is another key precious
metal. While not as rare as gold, silver has also been used as a store
of wealth throughout the centuries. And in modern times, the metal has
also found its way into countless other uses, including in
pollution-control devices installed on factories and power plants, as an
anti-bacterial agent and even as electrical wire -- silver is by far the
best conductor known to man.
With these factors in mind, it
should come as little surprise that gold and silver prices have been on
the rise recently -- moving higher in tandem with increasing inflation.
As you can see in my chart, which depicts the year-over-year change in
the consumer price index (CPI -- a common measure of U.S. inflation),
inflationary pressures are clearly building in the U.S. This is one
reason why the Federal Reserve has been so aggressive in continuing its
recent campaign of hiking interest rates.
And
while economic growth remains reasonably robust in the U.S., it's
clearly slowing. My chart of quarterly growth in U.S. Gross Domestic
Product (GDP) shows a distinct downtrend over the past year and a half.
And finally, while the U.S. dollar
has seen a decent rally this year, the currency has been falling against
the euro and other major world currencies over the past few years.
Thanks to gold's status as a currency and universal store of wealth, the
yellow metal often rallies when the U.S. dollar falls in value.
Gold and silver stocks are a
logical choice for investors looking for a portfolio hedge during
uncertain times. And, for at least the next several months, the group
should continue to perform well thanks to the factors I outlined above.
That said, it's worth highlighting a few key negatives about the gold
and silver mining industry:
- Gold mining is a commodity
industry. Since gold miners must sell their gold at prevailing market
rates (or must enter into contracts to sell gold at predetermined prices
in the future), there is no way to establish a competitive advantage or
secure any sort of product differentiation. Commodity industries like
this one are usually exposed to extreme cyclicality, and it is very difficult for firms to gain an edge over the competition.
- Many of the lowest cost,
easiest-to-mine reserves have already been exploited over the past
several decades. As a result, miners are increasingly being forced to
expand into more politically unstable markets or to employ more
technologically advanced mining techniques to mine precious metals. This
has led to rising costs.
- Gold miners in some
countries, such as South Africa, have had trouble keeping their costs
down and have remained unprofitable or only marginally profitable
despite a significant rise in commodity prices. The reason is that gold
is priced in dollars, yet these mining firms incur costs, such as wages, in their local
currencies.
A variety of mutual funds offer broad
diversification for investors interested in playing the gold industry.
Even better yet, many of these funds have exposure to mining stocks
listed in countries like South Africa and Australia -- markets that can
be tough for individual investors to access. What's more, mutual funds
specializing in the industry are usually actively managed, and many of
today's leading fund managers are well equipped to know which miners offer the
biggest benefits in terms of potential production growth and new finds.
In the table below, I've listed
a few of the best-performing gold and silver-focused mutual funds.
| Gold
& Silver Funds |
5-Yr.
Annual Return |
Expense
Ratio |
| American
Century Global Gold (BGEIX) |
+29.6% |
0.68% |
| Scudder
Gold & Prec. (SCGDX) |
+30.9% |
1.33% |
| Gabelli
Gold (GOLDX) |
+31.7% |
1.54% |
| Oppenheimer
Gold & Sp. (OPGSX) |
+26.8% |
1.26% |
And when it comes to individual stocks, there
are a plethora of small, fundamentally weak miners with unproven
reserves -- these companies are collectively referred to as the
"junior golds." Many such stocks have no revenues and are more
or less exploration firms with shaky prospects.
When investing in gold &
silver companies, investors are better off
sticking with the industry heavyweights, or at the very least, investing
in miners with some proven production potential. To view a table that
displays over a dozen of the world's largest and most respected gold and silver
mining firms, you'll need to visit one of the links below...
Editor's
Note:
To view the remainder of this article, in which StreetAuthority.com
founder Paul Tracy and his staff provide a table of over a dozen high-quality
gold & silver stocks, as well as in-depth profiles of their two
favorite companies from this list, you'll need to subscribe to our premium Market
Advisor newsletter. Please visit one of the following links to
continue...
Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Editor in Chief in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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