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Monday, November 02, 2009

Lauricella Ponders the Golden Question

by: Patricia Kelly

In an article in the Monday issue of the Wall Street Journal, Tom Lauricella tackles the question facing some investors of late – what is wiser, investing in a fund that owns gold-related stocks or an exchange-traded fund tracking the price of gold? The answer, he determines, is often based on returns.

Making the case for stock funds, most of which invest in mining companies, Lauricella notes that the average precious-metals stock fund is up 37 percent, according to Morningstar data. This surpasses the 19 percent gain posted by SPDR Gold Shares, the largest ETF directly tracking gold prices.

Gold-related stocks “are a leveraged play on gold,” states Joseph Foster, a portfolio manager for Van Eck International Investors Gold. Greater leverage, of course, means greater volatility and thus gold stocks have tended to move twice as much as the price of gold. This risk became a reality between August and October of 2008, when the average precious-metals stock fund lost 52 percent compared to SPDR Gold's 21 percent decline. When the market recovered however, so did gold stocks.

So while gold stocks may appear to promise greater returns at first glance, Lauricella argues that gold ETFs such as the SPDR or iShares Comex Gold Trust may in fact act as a kind of insurance policy, balancing out overall returns when the markets plunge. The choice then lies in an investor's ability to determine whether gold is in the midst of an extended bull market or if a decline in gold prices is looming on the horizon. 

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