What You Need to Know About Gold

By JEFF D. OPDYKE

Gold shined in 2008. Could 2009 be as bright?

Of all the major assets -- stocks, corporate bonds, cash and others -- gold was one of last year's few standouts. While so many investments collapsed amid the turmoil, the price of an ounce of gold posted a gain of about 4.3%.

Chris Gash

So far this year, the rare metal is up about 0.7%, after a rally Friday put it back in positive territory. And longer-term concerns are emerging that aggressive, untested government policies aimed at righting the flailing economy could ultimately fuel a further rise in gold prices.

When that might happen, no one knows. But for investors who want to hedge against potential economic turmoil, "buying gold is a very good idea for 2009," says Chuck Butler, president of EverBank World Markets in St. Louis.

The case for gold is this: The government is pumping trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reversing current deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation and fiat currencies.

The opposing view: "The inflation argument hasn't been seen yet in government data, and once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy," negating any inflationary pressures, says Tom Pawlicki, a precious-metals analyst at MF Global, who says he's "not friendly on gold."

Though gold is generally thought of as a physical asset, these days investors have a variety of options. Here are a few of them, along with the inherent pros and cons:

Bullion

This is the pure metal, typically cast as bars or coins in weights ranging from a single gram to one kilogram.

Bars like those minted by Credit Suisse and Pamp Suisse trade at a slight premium to gold's market price and are generally the least expensive way to own physical gold. Coins such as the American Eagle often include a collector's premium that can increase the cost slightly. Rarer coins can fetch substantially more.

Local coin shops generally sell bullion, though it's also widely available -- often at a smaller markup -- through a variety of online dealers, including Apmex.com and BostonBullion.com, among others.

Pros: Though this is conspiracy theory, if the government ever confiscates gold or limits its ownership -- as happened in the 20th century -- possessing gold in physical form offers some means of retaining control of your wealth in an economic disaster.

Cons: Risk of theft or loss if you keep gold at home. If it's in a bank safe-deposit box, you won't have access in an emergency if the bank is closed. And safe-deposit boxes aren't insured in the event of a disaster.

Pooled Accounts

These are sort of like a gold bank account in that your gold is held in a vault. The markup per ounce is usually less than 1% of gold's current market price, making this cheaper than owning physical bullion.

Depending on the provider, pooled accounts are either "allocated," meaning that specific, numbered bars are allocated to you, or "unallocated," meaning you're assigned a sum of gold, though not specific bars. Allocated accounts charge annual storage and insurance fees. Unallocated accounts generally don't. Kitco.com and EverBank.com offer pooled accounts.

Pros: Perhaps the most secure form of owning gold, since the metal is kept in a vault and the inventory is regularly audited. You can also request that your gold be sent to you, though you'll typically pay delivery and fabrication charges.

Cons: Annual fees in allocated accounts can add up over time, while some unallocated accounts are held in the company's name, meaning that if the firm goes bust, creditors can grab the company's assets -- including your gold.

Exchange-Traded Funds

These trade like shares of stock on a stock exchange, with each share representing some fractional portion of an ounce of gold. For instance, each share of the SPDR Gold Shares ETFrepresents 0.1 ounce, and thus trades at about a tenth the price of gold. The shares are typically backed by physical gold held in vaults in London, New York and Zurich and audited regularly.

Pros: Relatively cost-effective ownership, since you're not paying insurance and storage costs. Nor do you take physical possession of the metal, so there are no fabrication costs or risk of loss or theft. Buying and selling are instantaneous.

Cons: Taxes. The government treats gold as a collectible, and thus capital gains on a gold ETF are taxed at a flat 28%, nearly double the long-term capital-gains rates on stocks.

You also pay the ETF's management fees -- roughly 0.4% -- which depletes your account. You can't request that gold be fabricated into bars. And if the government ever does confiscates gold, "some people think ETF gold could be seized," says Leo Larkin, an analyst at Standard & Poor's Equity Research.

Mining Stocks

With publicly traded mining companies, you don't own the metal but you do own shares of companies digging holes in the earth. This is the most leveraged gold play, since a rising -- or falling -- gold price is spread across hundreds of thousands or millions of ounces the company has in the ground.

Pros: More bang for the buck. Mark Johnson, portfolio manager for the USAA Precious Metals & Minerals Fund, estimates that "you probably have to put two times as much money into bullion or ETFs to get the same exposure to gold as you do with mining shares."

Cons: Exposure to all sorts of corporate and geopolitical risks, based on the countries in which a particular gold miner operates. And because mining is so energy intensive, rising energy prices can negate some of the increase in gold prices.

Source from http://online.wsj.com/article/SB123284319920613125.html