You want to own gold. Maybe you’re worried about the potentially detrimental inflationary effects emanating from the Fed’s and global central banks’ policies; maybe you’re worried that the fiscal cliff agreement is simply kicking the can down the road and fiscal Armageddon looms on the horizon. Whether you’re in search of inflation protection, a safe haven asset, or both, gold may be a part of the  solution.

Regardless of your reasoning, owning the ultimate currency is not as  straightforward as you might think. To help out, we’ve compiled five common mistakes associated with investments in the precious metal. Avoiding the common pitfalls may help provide you with the desired investment exposure while minimizing any unanticipated drawbacks. Ultimately, we hope the following list can help reduce investment
headaches associated with your future gold investments.
 

1. Gold Stocks Ain’t Gold

A frequent mistake made by investors is to invest in gold mining  companies (both juniors and majors) as a substitute for gold. There are a couple of reasons why this may be a mistake. Firstly, gold mining company’s stock price does not precisely track the price of gold.

That’s because lots of other factors influence the share price of a company: management, cost pressures, mining diversification, stage of the mining process, to  name just a few. This problem is generally more acute for juniors than majors, because juniors often have yet to “strike gold,” therefore the stock price often trades more like an option. Moreover, many mining companies don’t only mine gold, many also mine silver, palladium, diamonds etc. This dynamic also holds for baskets of mining companies – baskets of miners have significantly underperformed the price of gold over recent years.

Some investors believe gold mining stocks may provide more attractive investment exposure to gold than gold itself. The investment thesis is as follows: gold mining companies are able to take advantage of an increase in the price of gold through enhanced operational leverage; as the gold price goes up, mining  companies’ margins widen, ultimately  increasing the bottom line. However, this theory is predicated on fixed costs staying relatively constant. Unfortunately, recent performance does not support this investment idea. Indeed, gold mining stocks, on aggregate, have significantly underperformed the price of gold. The reality is that  mining is a highly energy- intensive undertaking, and therefore many of the costs are closely linked to energy prices, such as oil, which has  also experienced significant increases in price. As a result, many  mining companies have not produced the anticipated high level of  profits. Additionally, governments may demand higher taxes and  employees higher wages from mining companies should profitability  increase, further limiting the upside potential for shareholders.


 

The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest riskswith the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Fund and to download a prospectus, please visit www.merkfund.com. Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund's website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest. The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Funds shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Fund is subject to interest rate risk which is the risk that debt securities in the Funds portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Funds prospectus. The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.

Education feed Join Telegram

Editors’ Picks

EUR/USD clings to modest gains above 1.0550 ahead of US data

EUR/USD clings to modest gains above 1.0550 ahead of US data

EUR/USD managed to regain its traction and turned positive on the day above 1.0550. The data from the Eurozone showed that Sentix Investor Confidence improved to -21 in December from -30.9 in November. Investors await ISM Services PMI data from the US.

EUR/USD News

GBP/USD stays below 1.2300 as US Dollar holds steady

GBP/USD stays below 1.2300 as US Dollar holds steady

GBP/USD has lost its bullish momentum and gone into a consolidation phase at around 1.2300. Ahead of the ISM Services PMI data from the US, the cautious market mood helps the US Dollar limit its losses and doesn't allow the pair to turn north.

GBPUSD News

USD/JPY sticks to modest gains above 135.00, lacks bullish conviction ahead of US data

USD/JPY sticks to modest gains above 135.00, lacks bullish conviction ahead of US data

The USD/JPY pair attracts some buyers near the 134.15-134.10 area on Monday and snaps a five-day losing streak to its lowest level since August 16. Spot prices, however, retreat a few pips from the daily top and slide back closer to the 135.00 psychological mark heading into the North American session.

USDJPY News

Editors’ Picks

EUR/USD clings to modest gains above 1.0550 ahead of US data

EUR/USD clings to modest gains above 1.0550 ahead of US data

EUR/USD managed to regain its traction and turned positive on the day above 1.0550. The data from the Eurozone showed that Sentix Investor Confidence improved to -21 in December from -30.9 in November. Investors await ISM Services PMI data from the US.

EUR/USD News

GBP/USD stays below 1.2300 as US Dollar holds steady

GBP/USD stays below 1.2300 as US Dollar holds steady

GBP/USD has lost its bullish momentum and gone into a consolidation phase at around 1.2300. Ahead of the ISM Services PMI data from the US, the cautious market mood helps the US Dollar limit its losses and doesn't allow the pair to turn north.

GBPUSD News

Gold loses traction, trades below $1,800

Gold loses traction, trades below $1,800

Gold price has reversed its direction and declined below $1,800 after having touched a fresh multi-month high of $1,810 during the Asian trading hours. The 10-year US T-bond yield clings to modest gains above 3.5% ahead of US data, weighing on XAU/USD.

Gold News

XRP bulls in spotlight as SEC v. Ripple court filing hints at early closure

XRP bulls in spotlight as SEC v. Ripple court filing hints at early closure

XRP holders are focused on the outcome of the US Securities and Exchange Commission’s lawsuit against Ripple. Defense lawyer James K. Filan expects the judge in SEC v. Ripple case to deliver one big written ruling soon. 

Read more

The Week Ahead: China Trade, RBA, BOC and US PPI

The Week Ahead: China Trade, RBA, BOC and US PPI

The Australian central bank appears to be already getting cold feet when it comes to its own inflation busting strategy, even as the RBNZ hiked rates again by another 75bps at its most recent meeting. 

Read more

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology