The Gold Standard

Gold is one of those investments that makes people hesitate before buying: it doesn't pay dividends, it doesn't have earnings to back up its price, and the price (annualized over the last 100 years) has barely broke even compared to inflation.  That being said, for as long as we know, Gold has always been adored by the human race and everyone wants to own it.  Over the last 6 years, Gold is up over 400% while the S&P 500 is just break-even over that same time period.  Gold is considered as safe or safer than most currencies, and unlike Greece, Gold will never default and will never be worthless.  There are 3 different ways you can own Gold:

1. Buying GLD or IAU

This is one of GLD's warehouses of Gold.

Buying Gold ETF's is probably the easiest way to own Gold.  These funds are very liquid, and can be traded easily on the NYSE.  GLD is one of the largest ETF's in the world, with a market cap of over $68 billion.  Rest assured, this ETF backs up their fund with physical Gold (as you can see on the right), so this option is the equivalent of buying Gold and having someone else hold it for you.  With Gold hovering around $1650/ounce, this is the perfect way to invest in fractional ounces of Gold.


2. Buying Gold Coins

The US American Eagle Gold Coin

Buying Gold coins is a fun way to own Gold. The United States American Eagle is one of the most popular Gold coins, but multiple countries around the world produce them.  The downside to buying coins is that you have to pay a premium for them.  Generally for a 1 ounce Gold coin, you will have to pay $100 over the current spot price for Gold.  Another downside is security, as storing Gold coins in your home can be dangerous if the wrong people become aware of it.  The advantage to Gold coins is that they are legal tender in the country that issued them.  For example, the US Gold Coin has a face value of $50, so if Gold were to go to $0 (not going to happen), this coin would still be worth $50.  Since you're going to be paying out $1700+ for one of these coins, the $50 face value does not seem like much of a consolation after all.

3. Investing in Gold Mining Stocks
This is perhaps the most intriguing way to own Gold right now.  Current industry experts all agree that Gold Mining stocks are vastly undervalued, so if you are a value investor who is still wary about Gold, this is the way to go.  Over the last year, the Miners have underperformed GLD by 20% and over the last 5 years they have underperformed over 100%.  Gold Mining companies own the land where they mine the Gold, so when the price of Gold goes up, the value of their natural resources goes up as well.  Accounting policy follows conservatism, meaning that these companies are valued with a Gold price of much less than $1600 in mind.  If Gold doesn't see a major correction, expect Gold Mining Stocks to soar.  2 ways to invest in the miners could be through the ETF GDX or the mutual fund Tocqueville Gold.

As of late, Gold has become a safe haven when there is fear in the market.  With the U.S. debt ceiling issue and the European debt crisis, fear is here to stay, at least for the foreseeable future.  Gold is also a great inflation hedge, as the price is based on the U.S. dollar if you buy in the United States.  If Ben Bernanke decides to start QE3, you can expect to see Gold rise by around 20%, as it did during QE2.

I see Gold as a long term investment the can have volatile swings in the short run.  Because of this, I have a long target price of $3,000 by 2015 for Gold.

Disclosure: I am long IAU and Tocqueville Gold