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Is Gold a Safe Haven for Your Portfolio? By Rob Wherry October 18, 2007 BLACK GOLD MAY have been the hot commodity for the past several years, but the old-fashioned bricks you see sitting in Fort Knox are starting to get a lot of attention, too. In fact, gold is trading above $750 an ounce, its highest level since 1980. For most people, investing in gold has meant buying fine jewelry, collecting coins or purchasing a single ounce as a novelty. But even the smallest investor can now take that a step further by scooping up shares in one of the 59 mutual and exchange-traded funds and share classes that focus on the shiny stuff. There's currently $28 billion sitting in these funds, according to Lipper, and their average 26.1% return year-to-date outpaces every mutual fund category except energy and some emerging markets. Building a position in gold-based funds is unlike any other investment in your portfolio. Gold is what's called a noncorrelated investment. It will generally lag equities during bull markets. However, it also tends to rise as the U.S. dollar falls in value and inflation is rearing its ugly head — two things that, depending on who you talk to1, are in store for the U.S. economy. In other words, while your wallet may be getting pummeled at the gas pump or at the supermarket, gold can help your portfolio survive a similar assault. "If the dollar continues to deteriorate — and that's a long-term theme of mine — gold will be a safe haven," says Matt McCall, editor of the ETF Bulletin. That said, gold's prospects can rise and fall quickly. And, if you're like most investors, you probably don't have that Ph.D. in economics that will help you predict inflation and make a gold fund worthwhile. "The economy can always blindside you," says David Yeske, co-founder of wealth management firm Yeske Buie in San Francisco. He has considered putting money into gold, but is skeptical about whether it's a good long-term investment. "Trying to predict how certain sectors will perform is almost impossible. I don't like making narrow bets like that." Indeed, we think most people are better off in a broad-based commodities fund or with a low-cost equity offering that's run by a seasoned stock picker. If you do decide to jump into one of these gold funds it should only account for a small portion of your assets — our experts suggest a range from 2% to 10%, depending on the individual — and you should always keep a close eye on it once you buy in. If you want an option that you can get in and out of quickly, then an exchange-traded fund may be the way to go. ETFs allow investors to buy a basket of stocks like an index fund. The difference is that they trade throughout the day. So if you need an escape hatch it's a little easier to sell with an ETF — although finding a willing buyer isn't a guarantee. The $14 billion StreetTracks Gold Shares (GLD2), launched in 2004, and the iShares Comex Gold Trust (IAU3), are two funds that invest in gold bullion (think gold bars and ingots). A share in either fund represents one-tenth of an ounce of gold. While these ETFs can offer your portfolio some long-term insurance against downturns, the duo is also a way for investors to tap into the rising price of gold during short-term bursts. The funds, which charge low annual expense ratios of 0.40%, have returned around 18% in 2007. Market Vectors Gold Miners ETF (GDX4) takes a bit of a different tack. This fund tracks an index of 35 mining companies located in countries like the U.S., Canada, South Africa and Peru. Its top holdings include Barrick Gold (ABX5), Newmont Mining (NEM6) and Goldcorp (GG7). While it's had some healthy returns, this fund hasn't been as intriguing an investment as its competitors this year. It also charges an expense ratio that's almost 38% higher than the iShares and StreetTracks funds and it trails their performance year-to-date by two percentage points. But when it comes to gold, we think the smartest route is to go with an experienced manager who not only knows the industry, its major players and a thing or two about the world economy, but also has a grasp of geopolitical debates. After all, even though the price of gold may be rising — a phenomenon that should positively impact the bottom line at gold-mining companies — not every firm is as profitable as others. Some of these firms have to dig deeper to explore the veins buried far down in the earth. Other firms operate in risky parts of the world. Gold may look pretty hanging around your neck, but the industry itself doesn't have such a clean luster. American Century Global Gold (ACGGX8) has been run by Bill Martin since 1992, making his tenure one of the longest in the category. Although Martin hasn't always been a bull on gold, he likes the current environment because of several factors: strong global supply and demand; increasing wealth in emerging markets; European banks divesting some of their holdings; and the general malaise of the U.S. dollar and economy. "[Gold] is an insurance policy to buy when nothing else is working," says Martin. His fund tracks the S&P/Citigroup World Equity Gold index of 88 companies that are spread throughout the U.S., Canada, South Africa and Australia, among other nations. While the fund largely resembles its benchmark, Martin also subtly increases and decreases the weights of some stocks he thinks are undervalued or fully priced. That strategy hasn't allowed his fund to beat the static ETFs in 2007, but we're confident his long-term track record will prove to be the best bet over time. One more selling point: Although you pay a sales load, this fund charges the same 0.40% annual expense as the iShares and StreetTracks funds while providing the benefits of a veteran manager, too. Links in this
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