Investors in gold have, essentially, three basic alternatives: (1) bullion; (2) individual equities; or (3) funds that invest in gold and gold-related equities (gold mutual funds, Exchange Traded Funds – ETFs, etc.).
Bullion or Coins
Bullion or coins are a relatively conservative way to invest in gold. While investing in the physical metal may sound simple, it requires special considerations, such as having safe-keeping (custodial) arrangements to store the metal and determining the creditworthiness of the custodian. These considerations make bullion investing unrealistic for many investors.
Equities of Gold Mining Companies
Equities of gold mining companies offer greater leverage than direct ownership of the metal itself. The sensitivity of share prices to a hypothetical rise in metal price is related to the cash flow from current production and the valuation impact on proven and probable reserves. Excessive reliance on trading strategies to generate returns, however, can be expensive and tax-inefficient, as well as time consuming. Many who have tried to outsmart this market by hyperactive trading have under-performed. And, it requires substantial research, analysis, and continual monitoring.
Gold Mutual Funds
Benefits of Gold as an Investment
- Diversification — Gold belongs to a distinct asset class and may be an effective means of portfolio diversification.
- Low Correlation — Gold typically has a low correlation with the overall U.S. equity markets (as measured by the S&P 500). Gold not only diversifies your portfolio but, when included with a portfolio of U.S. equities, may help dampen the volatility of the overall portfolio.
- Hedge — Gold has traditionally acted as a hedge against financial assets. So, in uncertain times and in periods of high inflation, gold may act as an effective store of wealth.
- Demand — Demand for gold is fueled by the jewelry industry, industrial demand, and by central banks worldwide.
Also see Gold Investing and Gold Funds
Investments such as gold mutual funds are managed by professionals who can assess the relative merits of investing in bullion and equities, do the necessary research, and continue to monitor the portfolio regularly.
Morningstar, Inc., a mutual fund rating service, defines gold mutual funds — those having a precious metals objective set out in the offering prospectus — as those “Funds that pursue capital appreciation by investing primarily in equity securities of companies engaged in the mining, distribution, or processing of precious metals.”
Likewise, Morningstar assigns gold mutual funds to its “Specialty–Precious Metals Category” if the fund’s portfolio focuses on “mining stocks, though some do own small amounts of gold bullion. Most portfolios concentrate on gold-mining stocks, but some have significant exposure to silver, platinum, and base metal mining stocks as well. Precious metals companies are typically based in North America, Australia, or South Africa.”
Midas Fund, included in Morningstar’s group of gold mutual funds, pursues gold investing by having at least 65% of its total assets in
(i) securities of companies primarily involved, directly or indirectly, in the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources (“Natural Resources Companies”) and
(ii) gold, silver and platinum bullion.
Up to 35% of the Fund’s assets may be invested in securities of companies that derive a portion of their gross revenues, directly or indirectly, from the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources, in securities of selected growth companies and fixed income securities of any issuers, including U.S. government securities.
Like many gold mutual funds, Midas Fund may invest in domestic or foreign companies that have small, medium or large capitalizations and concentrates its investments by investing at least 25% of its total assets in Natural Resources Companies. Because gold mutual funds typically concentrate investments in smaller companies and foreign securities, with mining and exploration risks of precious metals, gold mutual funds are riskier and more speculative than general, diversified funds. Unlike some other gold mutual funds, in seeking to enhance returns, Midas Fund may use futures, options and short sales, and may use leverage.
Midas Fund may engage in short selling up to 100%, although the Fund has no current intention of more than 40%, of its net assets, and it may engage in options and futures transactions subject to cover requirements (see “Cover for Options, Futures, and Forward Currency Contract Strategies” in the Statement of Additional Information (“SAI”) for more information). There is a risk that these transactions may reduce returns or increase volatility. In addition, derivatives, such as options and futures, can be illiquid and highly sensitive to changes in their underlying security, interest rate or index, and as a result can be highly volatile. A small investment in certain derivatives could have a potentially large impact on a Fund’s performance.
We believe that a reasonable allocation to a gold mutual fund in a conservative, diversified portfolio would be limited to 3% and up to 10% for aggressive investors.
Through gold investing, Midas Fund seeks primarily capital appreciation and protection against inflation and, secondarily, current income. Midas Fund owns securities of companies primarily involved, directly or indirectly, in the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources.
Successful gold investing depends on many factors. Chief factors considered by Midas Fund’s investment manager in gold investing, among other things, are the ore quality of metals mined by a company, a company’s mining, processing and fabricating costs and techniques, the quantity of a company’s unmined reserves, quality of management, and marketability of a company’s equity or debt securities. In gold investing, management emphasizes the potential for growth of the proposed investment, although it also may consider an investment’s income generating capacity as well.
In seeking capital appreciation or income from gold investing, Midas Fund may sell an investment when the value or growth potential of the investment appears limited or exceeded by other investment opportunities, when an investment in the issuer no longer appears to meet the Fund’s investment objective, or when the Fund must meet redemptions.
Unlike some gold mutual funds, Midas Fund may also invest in other natural resources companies, such as those involved in ferrous and non-ferrous metals (such as iron, aluminum and copper), strategic metals (such as uranium and titanium), hydrocarbons (such as coal, oil and natural gas), chemicals, forest products, real estate, food products and other basic commodities, if the investment manager deems them to have attractive investment characteristics.
When seeking to achieve its secondary objective of current income, Midas Fund normally invests in fixed income securities of issuers with investment grade ratings. The Fund may invest in certain derivatives such as options, futures and forward currency contracts. The Fund also may engage in leverage by borrowing money for investment purposes. The Fund also may lend portfolio securities to other parties and may engage in short selling. Additionally, the Fund may invest in special situations such as restricted securities, liquidations and reorganizations, which might or might not involve gold investing. The Fund may, from time to time, under an adverse gold investing market or other conditions, take temporary defensive positions and invest some or all of its assets in cash and cash equivalents, money market securities of U.S. and foreign issuers, short term bonds, repurchase agreements, and convertible bonds. When the Fund takes such a temporary defensive position, it may not achieve its investment objective.
Morningstar, Inc., a mutual fund rating service, defines gold funds – those having a precious metals objective set out in the offering prospectus – as those “Funds that pursue capital appreciation by investing primarily in equity securities of companies engaged in the mining, distribution, or processing of precious metals.” Likewise, Morningstar assigns gold funds to its “Specialty–Precious Metals Category” if its portfolio focuses on “mining stocks, though some do own small amounts of gold buillion.
Most portfolios concentrate on gold-mining stocks, but some have significant exposure to silver, platinum, and base metal mining stocks as well. Precious metals companies are typically based in North America, Australia, or South Africa.” Midas Fund, included in Morningstar’s group of gold funds, pursues gold investing by having at least 65% of its total assets in
(i) securities of companies primarily involved, directly or indirectly, in the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources (“Natural Resources Companies”) and
(ii) gold, silver and platinum bullion.
Up to 35% of the Fund’s assets may be invested in securities of companies that derive a portion of their gross revenues, directly or indirectly, from the business of mining, processing, fabricating, distributing or otherwise dealing in gold, silver, platinum or other natural resources, in securities of selected growth companies and fixed income securities of any issuers, including U.S. government securities.
Gold Funds
Like many gold funds, Midas Fund may invest in domestic or foreign companies that have small, medium or large capitalizations and concentrates its investments by investing at least 25% of its total assets in Natural Resources Companies. Because gold funds typically concentrate investments in smaller companies and foreign securities, with mining and exploration risks of precious metals, gold funds are riskier and more speculative than general, diversified funds. Unlike some other gold funds, in seeking to enhance returns, Midas Fund may use futures, options, short sales, and leverage.
Gold Bullion
Traditional Way of Investing in Gold Bullion
The most traditional way of investing in gold is by buying gold bullion. In some countries, like Argentina, Austria, Liechtenstein, and Switzerland, gold bullion can be bought and sold “over the counter” at many banks. An investor can also contact a gold bullion dealer who will provide the same service. gold bullion is available in various sizes. For example, in Europe, gold bullion would typically be in 12.5kg or 1kg gold bullion bars (1kg = 32.15072 Troy ounces), although many other weights exist, such as the Tael, 10oz, 1oz gold bullion bar, 10g, or 1Tola. gold bullion can be held either directly or indirectly. Because of the many difficulties of transporting and storing gold bullion, a popular method of investing in gold bullion for the small investor is via allocated holdings using a gold bullion account.
Buying Gold Bullion Coins
Buying gold bullion coins is a popular way of holding gold bullion. Typically, gold bullion coins are priced according to their weight with little or no premium above the gold bullion price. Among the most popular gold bullioncoins are the South African gold bullion Krugerrand, the Canadian gold bullion Maple Leaf, the American gold bullion Gold Eagle and Gold Buffalo, and the Australian gold bullion Gold Nugget, all of which contain exactly one troy ounce of gold bullion each. Another popular one ounce gold bullion coin is the Austrian gold bullion Philharmonic.
Buying Gold Bullion ETFs
Gold bullion exchange traded funds (ETFs) represent an easy way to gain exposure to the gold bullion price without the inconvenience of storing physical gold bullion. Typically, a small commission is charged for trading in gold bullion ETFs and a small annual storage fee is charged. The annual expenses of gold bullion ETFs include gold bullion storage, insurance, and management fees which are charged by selling a small amount of gold bullion represented by each ETF unit, so the amount of gold bullion in each unit will gradually decline over time. In some countries, gold bullion ETFs represent a way to avoid the sales tax or the VAT which would apply to physical gold bullion coins and gold bullion bars.
Investment in Gold Bullion is Considered Speculative
Investment in gold bullion is considered speculative. gold bullion prices can be influenced by a variety of global economic, financial, and political factors and may fluctuate substantially over short periods of time and be more volatile than other types of investments. Economic, political, or other conditions affecting one or more of the major sources of gold bullion could have a substantial effect on supply and demand in countries throughout the world. The market for gold bullion is relatively limited and is unregulated. Additionally, the majority of gold bullion producers are concentrated in countries that have the potential for instability. Economic and political conditions in those countries may have a direct effect on the production and marketing of gold bullion and on sales of central bank holdings of gold bullion, if any. The price of gold bullion has fluctuated widely over the past several years and may be affected by global gold bullion supply and demand, which is influenced by such factors as forward selling by gold bullion producers, purchases made by gold bullion producers to unwind gold bullion hedge positions, central bank gold bullion purchases and sales, and production and cost levels in major gold bullion producing countries; investors’ expectations with respect to the rate of inflation; currency exchange rates; interest rates; investment and trading activities of hedge funds and commodity funds; and global or regional political, economic or financial events and situations.
Gold bullion does not generate income, unless loaned and its returns are from gains or losses realized upon sale. Investments in gold bullion can present concerns such as delivery, storage, and maintenance, possible illiquidity, and the unavailability of accurate market valuations. Furthermore, gold bullion investors may encounter storage and transaction costs in connection with their ownership of gold bullion that may be higher than the costs attendant to the purchase, holding, and disposition of securities of companies engaged in gold bullion related businesses. The price of gold bullion, however, is less subject to local and company specific factors than securities of individual companies engaged in gold bullion related businesses. As a result, gold bullion may be more or less volatile in price than securities of companies engaged in gold bullion related businesses. There is no assurance that gold bullionwill maintain its long term value in terms of purchasing power in the future.
Morningstar Rating Methodology for Determining 5 Star Funds
In June 2002, Morningstar revised its rating methodology for determining 5 star funds and below. The universe of mutual funds was segregated into 48 categories instead of four broad asset class categories and 5 star funds are now a subset of those 48 categories. Morningstar did this to facilitate the comparison of 5 star funds against more relevant peer groups so funds would become 5 star funds when their managers added value rather than when their category performed well. Morningstar also sought to incorporate the risks of 5 star funds in the 5 star funds rating calculation so it adopted a utility function of risk measure that identifies 5 star funds based on volatility. Additionally, the risk measure of 5 star funds is more heavily weighted relative to the returns of 5 star funds in the 5 star funds rating calculation.
The 5 star funds rating is a quick way to gauge whether a fund has added value over time on a risk adjusted basis. The 5 star funds rating should only be one of many factors considered by investors when evaluating and selecting funds for investment. The 5 star funds rating is objective, based entirely on a mathematical evaluation of past performance. The 5 star funds rating is a useful tool for identifying 5 star funds worthy of further research but should not be considered buy or sell recommendations.
For more information regarding Morningstar ratings for 5 star funds, please visit https://www.morningstar.com/5-star-etfs.
On December 8, 2009, Advisor Perspectives published an article titled “Morningstar Ratings Fail over a Full Market Cycle.” Using data for the three years ending September 30, 2009, Advisor Perspectives found that Morningstar’s ratings lost virtually all of their predictive ability when measured over a full market cycle.
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