$700 gold: Want in? Think twice

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The meteoric rise of metals in recent years has enriched commodities investors -- should individual investors follow suit?

By Rob Kelley, CNNMoney.com staff writer

May 9, 2006: 3:19 PM EDT


NEW YORK (CNNMoney.com) - There was a time when investors didn't want gold bars anywhere near their portfolios, but it's long forgotten now.

As gold futures surged past the $700 an ounce barrier to their highest level in 25 years Tuesday (full story), it was easy for investors to forget that in 1999 gold was stuck around an anemic $250 an ounce.


As gold futures surged past the $700-an-ounce barrier Tuesday, it was easy for investors to forget that in 1999 gold was stuck around an anemic $250 an ounce.


But with a weak dollar and fears of oil shortages making headlines again, gold and other metals have made remarkable gains, earning outlandish returns for commodities investors. Nymex gold futures are now up a scorching 59 percent over the past year, and a mind-boggling 147 percent over the past five. Stock markets, eat your heart out.

And investors have been pouring their dollars into new gold investment vehicles.

It's not just gold either - among metals, the poorest performer over the past year was platinum with a 25 percent gain. Silver, palladium and copper are all up at least 65 percent in the previous 12 months.

Now more individuals want in to metals markets - should you follow suit?

Precious metal prospects
The first crucial question for potential gold investors is whether its jump to $700 was a temporary boost or a level that's here to stay. The recent bout of high oil prices has made investors worry that it will push up prices on all kinds of goods and services, eating away the purchasing power of the dollar. Gold is one of the rare investments that maintains its value during periods of inflation.

And the massive U.S. trade deficit, expected to be $67.5 billion trade gap for February, according to Reuters, has also contributed to a weak dollar.

"So long as there's the threat of higher energy prices and the dollar remains low, metals could rise even higher," said Jim Quinn, commodity floor analyst with A.G. Edwards. "From a technical perspective, the market could certainly exceed current levels."

Analysts caution, however, that investing in gold can be a risky move, one that's usually handled by traders who've built up years of experience understanding metals markets.

But if investors want to speculate on gold, how can they put their money in bullion?

The most direct way to jump into the gold markets is to invest in one of the two major gold exchange-traded funds (ETFs). Barclay's has the iShares COMEX Gold Trust (up $1.99 to $69.67, Research) and SSGA offers the competing streetTRACKS Gold ETF (up $2.02 to $69.58, Research). The Street Tracks fund appeared in December 2004, one month ahead of the iShares ETF, and attracted a lot of pent-up investor interest.

Andrew Clark, senior research analyst at Lipper, said that both funds, but especially the SSGA product, have seen a huge inflow of money since their introduction. "The StreetTracks fund has performed immensely," he said. "It's been out about a year but already it's in the billions of dollars invested."

The Barclays ETF has attracted $549 million since its inception, and now has $671 million under management after appreciation, according to the company.

And NYMEX also trades futures contracts in five other metals: silver, copper, aluminum, platinum and palladium. Thus far, only gold and silver have ETFs to represent them, but copper is a possibility in the near future.

Barclays introduced its long-awaited silver ETF - the iShares Silver Trust (Research) - on April 28, after a long S.E.C. approval process. (Full story)

Barclays also has a broad-based commodities ETF, based on the Goldman Sachs Commodities Index, in the S.E.C. registration process. That index contains 24 commodities from all commodity sectors including 5 metals.

"We are the largest provider of ETFs - with over 100 available - and you can expect more from us," said Christine Hudacko of Barclays. "It's our intention to have a broad family of ETFs. We've heard interest in a copper ETF and are exploring that."

There are also many mutual funds with exposure to gold markets, but they don't deal purely with the commodity itself. The funds invest in gold miners and manufacturers, and depending on their goals, may hold the commodity itself.

Karen Wallace, a fund analyst at Morningstar, says that the two such mutual funds with lowest fees and most experienced managers are the Vanguard Precious Metals and Mining (Research) and the American Century Global Gold (Research). However, the Vanguard fund attracted so many investment dollars that managers decided to close it to new investment, she said.

Investors still need to consider their investment goals - and especially their risk tolerance - and consider gold alongside other market options. "There are other ways to hedge inflation - gold can be extremely volatile," said Wallace. "Real estate investment trusts (REITs) are another investment option that has a low correlation to the stock market. But it all really depends on what somebody's portfolio looks like."

Volatility
Few investment vehicles have seen as much shakeup over the past 25 years as gold. In 1980, it touched $873 an ounce after rampant inflation engulfed the nation, but then plunged to a low of $254.80 in August 1999.

And these huge long-term swings are now being complemented by larger day-to-day shifts.

"We're seeing price swings that we haven't seen in decades. We used to see a $6 range in gold over a week, and now we see it in a single day," said Quinn. "The gold market is really going to be in play over the course of the year."

For investors, that means that they should be prepared for the possibility of major short-term losses.

"Not everybody could handle losing 40 percent in one year," said Wallace. "Most people probably don't need an investment in precious metal funds."