Jan 18, 2008

Yeehaw, I Bought Gold -- How to Get In on the Hot Commodity

...And not in the form of a pretty necklace, either.

With my limited knowledge of the stock market and this recession that's going on, it seems that gold is one investment that works well during this sort of time. It sounds like if the rest of the economy decides to miraculously recover, gold's value might go down, but then my other mutual fund-held stocks would go up... hopefully making my fantastical logic actually work in the long run.

I'm a bit worried about this, but in I bought a whopping 4 shares of a gold ETF for something like $320. If the price goes up because a major recession hits, awesome. If it goes down, I've learned my lesson.

"Ultimately, the only logical reason to invest in gold stocks is if you believe, after you have done your own due diligence and research, that the gold price is going higher. If you arrive at the conclusion that gold is heading lower, you are better off not owning any gold stocks. Gold stock investing ultimately boils down to a bet for higher gold prices.
" -- Zeallic.com

It's all ING Direct's fault. I decided to start saving my money through them. Of course they bought Sharebuilder recently, so they advertise the budget trading site on their "savings" site. I've been wanting to sign up to do some individual and ETF trading... without making that my entire portfolio. I don't know if now is a good time to get into the stock market or not. I feel like most of the stock prices out there are down due to news of the recession... so either this recession will kill off some companies, or the companies I invest in will survive and prosper in the long run. Needless to say, I'm not going to be... THAT stupid. I acknowledge that I'm playing with fire here, as I really don't know what I'm doing. Except I know that following the advice for beginning investors -- "invest in Vanguard mutual funds" hasn't been going that well. I'm not going to sell off those funds, but I'd like to diversify my portfolio a bit. Thus, I went out and bought myself some gold, baby.

Apparently there are a few different ways you can invest in gold:

The lowest risk is through buying coins of solid gold. Then you own the precious metal, but you have to figure out where to store it, and then pay insurance, and... that just seemed way too complicated and frustrating to deal with for a relatively small purchase of less than $500 that I planned to make.

These are fairly new in the world of gold. From what I can tell, there are two different options. You've got streetTRACKS Gold Shares (GLD) and the iShares Comex Gold Trust (IAU). They're a good way to get your feet wet in the gold market without going super high risk, while also not having to deal with all the trouble that comes with insuring coins. Basically, they're both ETFs or "Exchange Traded Funds." According to Wikipedia... Exchange-traded funds (or ETFs) are securities certificates that state legal right of ownership over part of a basket of individual stock certificates that can be traded at any time throughout the course of the day. Typically, ETFs try to duplicate a portfolio such as SPY or the Hang Seng Index, a market sector such as energy or technology, or a commodity such as gold or petroleum. Sounds like a more focused mutual fund to me... which is nice because you can invest in a commodity without the risk of investing in just one company. Or...

Individual Stocks
You can buy individual stocks in gold mining companies. This is the highest risk option because even if the gold market as a whole is soaring, one company can falter and go out of business. Or maybe they just don't have technology that lets them keep up with the other companies. Owning an ETF mitigates this risk because you own stock in many different companies. But, of course, with the risk you also can reap great rewards.

... I ended up buying the GLD ETF, mostly because on Sharebuilder the other ETF option wasn't available for trade and it was 6am when I decided to start trading (yea, I know, I shouldn't try to understand investing after I've been up all night).

Do any of you have a better explanation of gold stocks and enlighten me if I'm being a complete idiot?


Anonymous said...

Whether or not you made the right decision buying gold here won't be clear for a long time....but there are a couple of reasons not to. Gold is relatively 'high' right now, though how high still remains to be seen. And gold itself doesn't pay any dividends. For that you'd have to buy a gold mining company. That being said, I bought a few gold coins back in 1980, (for about $370) when gold was on its way to $850. I still have'em, and the mutual fund I had at that time has done far better, even with gold at its current high price. Gold HAS a place in a portfolio, so I wouldn't feel bad about having some. One other thing to think about is the inability to use an ETF to buy bread or other necessities with it in a 'Mad Max' world, LoL....

Julie the Graduate said...

I don't have a better explanation, but thanks for yours!

@ Anonymous: would a gold coin really help you more than an etf in a "mad max" world? I would think that any worthwhile skill would help a lot more than something shiny. :-)

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