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A Golden Parachute For Your Portfolio + Vic Wisemann’s Thoughts on: GLD, IAU, NEM, GFI, ABX, FCX, GG, IAG

Vic Wisemann
InvestorsObserver
Featured Contributor

Nowadays, you'd be hard pressed to miss the ads on television or in newspapers and magazines either touting gold for sale or pitching you to sell your scrap jewelry to a refiner. Gold, to put it plainly, is in demand.

In troubled and bleak times, gold continues to be the preferred investment among those seeking safe havens. There's nothing new about that except perhaps the ever rising price targets and fever pitch taken by the infomercial gold sellers.

Sensible advisers have long counseled investors to hold at least some part of their portfolios in metal or metal proxies, either as an inflation hedge or as a stabilizer in times of crisis. Depending on the advisor and the personal situation of the individual investor, target positions range from the relatively small, say 2%, to a ridiculously large 20% (usually commodities specialists are on this end). While a 2% position may not be a big investment, you don't need big investments to capture the effect.

Investment in gold has recently been on the rise as investors anticipate a coming period of heavy inflation. In a report recently released by the World Gold Council (WGC), total investments in gold vaulted by 248%, or 596 tonnes, year-on-year in the first quarter of the year. In value terms, this represented a net inflow of $17.4 billion from $5.1 billion a year earlier.

Read on to see how to make your portfolio golden, even if inflation creeps in.

Investment in gold includes exchange traded funds (ETFs), miners, bars and bullion coins. The rise in gold investment began in the third quarter of 2008 as investors rushed for the precious metal following the collapse of Lehman Brothers Inc in September last year.

Some hedge funds remain dazzled by gold. And the yellow metal's resilience during a rally in riskier assets suggests their bet might yet pan out.

A who's who on Wall Street piled into gold-related investments over recent months. Paulson & Co., Greenlight Capital, Eton Park Capital Management, Hayman Advisors, Blue Ridge Capital Holdings and Highfields Capital Management were among those buying gold futures, shares of gold producers and even physical gold.

To get gold into your portfolio, you don't have to put your money with a hedge fund manager and you don’t have to buy gold bars or coins either. Exchange traded funds have made gold bullion accessible to everybody. In just a few short years, the biggest of these ETFs, SPDR Gold Trust (GLD), has acquired an amazingly huge tonnage of the stuff. They have all but seven of the world's central banks. Because of this, the fund is able to reflect the performance of the price of gold bullion. The Trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets.

Another EFT to consider would be iShares Comex Gold Trust (IAU). The fund expects the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time. The trust receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust's liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption.

Now, before the gold can be turned into bars, coins or jewelry, someone has to get it out of the ground. The gold miners are another place to get exposure to gold without actually having to own gold.

Until this decade, few Westerners invested in physical gold. Nearly all precious-metals mutual funds invest in the stock of gold-mining companies. The argument for gold stocks, as opposed to the metal itself, is that miners are heavily leveraged to the price of gold. Once their costs are covered, each additional ounce produced is pure profit.

Some gold mining stock to look at would be Newmont Mining (NEM) and Gold Fields Ltd (GFI). These companies primarily engage in the exploration, development, production, and sale of gold and have assets around the world. Another gold miner to consider would be Barrick Gold Corporation (ABX). In addition to gold, the company also has small interests in copper and silver as well as platinum and nickel.

For a more diversified miner, you could consider Freeport McMoran Copper and Gold Inc (FCX), Goldcorp Inc (GG) and Iamgold Corporation (IAG). These companies engage in the exploration, mining, and production of mineral resources. Among the many things they mine for are copper, zinc, gold, silver, cobalt, diamonds, and molybdenum deposits. With a more diversified profile, these companies offer less risk when compared to companies who mine primarily for gold; they also offer less reward.

For a hedged trade on a gold miner, consider looking at the July 40/35 Bull Put spread for a 45 cent credit. That's a 9.9% return and the stock has to fall over 14% to cause a problem.

As with all trading in the market, there are risks to consider. Be certain any trade you enter fits into your personal goals and tolerances. Do your research and have some patience and you could make your portfolio golden.

If you have had any additional thoughts, ideas or unused gold jewelry in your basement, please e-mail me at vwisemann@InvestorsObserver.com.