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.