Mutual funds are another way of getting exposure to gold that doesn’t involve physical storage. These are stock funds that invest in the stock of companies that mine, distribute and process precious metals. They often also invest in gold-linked derivatives like futures or options.
Mutual funds are fairly widely available and their shares can usually be bought for a low price compared to gold bars. Since they invest in shares, they offer leverage (at least in theory). The value of a mutual fund’s shares increases or decreases faster than the value of gold, but this tendency has been much less noticeable since 2006. Mutual funds also allow investors to diversify – they hold shares of many companies in their portfolio. For those investing small amounts of money, diversifying on their own is often impossible. Diversification also means that buying mutual fund shares can be less risky than buying stocks of one or two gold mining firms because the risk is spread over a greater number of firms.
Mutual funds can be considered a very liquid investment. They can be bought or sold at any time for a price that, for open-end funds, is equal to their net asset value (NAV), and for closed-end funds, is determined by the supply and demand for their shares (based on buy and sell orders). Mutual funds are managed by educated specialists who (at least in theory) should deliver a higher return with lower risk. There are many types of mutual funds in the market that may suit your risk profile or age, including aggressive or conservative funds.
The main disadvantage of gold mutual funds is the fact that they are not physical gold and usually don’t even own gold. They invest in stocks, which means that their value, despite a high correlation, may not always follow the price of gold. Although they are highly dependent on the price of gold, they are not gold. Gold mining stocks are currently (March 2012) on average cheaper than at the end of 2010, even though gold costs 300 USD more. Moreover, buying mutual fund shares involves various commissions, costs or fees, like a fee for buying its shares (called a front-end load), for selling them (back-end load) or a management fee. Although these fees are not very high, they decrease the overall return on the investment. The fact that they are managed by professionals can be considered an advantage, but it is also the source of these fees. When investing in a mutual fund we don’t know the specific positions the fund will take. We only know the general strategy that is developed by its management. Although mutual funds allow for diversification, this doesn’t mean that the positions a fund takes will match the risk profile of a given investor. There is also the risk that the fund may go bankrupt and its clients lose the money they invested.
Mutual funds in the USA
Mutual funds that invest in precious metals are offered by many investment firms, including:
- First Eagle Funds
- ASA Gold and Precious Metals Ltd.
- Franklin Templeton
- GAMCO Investors