Gold market predictions and gold funds

James Woodburn - Thu 25 May, 2006

...Gold market predictions and gold funds...When you are investing in the hottest trend, you'd better be ready for a bumpy ride...Last weeks dip was a strong correction after a months worth of quick gains. Investors not willing to wait for long-term gains cashed in their profits and moved on. Now, I expect it will take a few more weeks for gold to climb back to previous levels...

When you are investing in the hottest trend, you'd better be ready for a bumpy ride.

As weak investors hop in and out of the market, prices are bound to surge back and forth.      

That is exactly what has been happening to investors of gold. For them, it has been an odd couple of weeks.  

After climbing to a high of nearly $720, the price per ounce of gold made a quick drop below $650 earlier this week. Today, it is on the climb once again. As I write, the metal is trading for $666.40 per ounce.
 
Last week’s dip was a strong correction after a month’s worth of quick gains. Investors not willing to wait for long-term gains cashed in their profits and moved on. Now, I expect it will take a few more weeks for gold to climb back to previous levels.
 
But the yellow metal will get a bit of a boost from a new ETF that hit the market last week...

Van Eck Global, a firm that specialises in hard-asset funds, officially launched its new fund, Market Vectors- Gold Miners last Monday.

So far, early investors are up about 8%.
     
The fund, which is designed to track the Amex Gold Miners Index, entered the market at a good time. Gold was cheaper than usual and is heading back up.  

Now, don’t get this new fund confused with existing funds like StreetTracks Gold Trust or iShares Comex Gold Trust. They are two entirely different beasts.
     
The Market Vectors fund simply invests shareholder money in gold mining equities.
 
The other gold ETFs on the market strictly follow the price of gold. They invest directly in gold bullion, not the companies that are making money by mining the metal.
    
So which is better?

Of course, it all depends...

And it's far from a solid answer!

If you are looking for a pure play on gold prices, then the choice is obvious. Invest in gold bullion. But if you are looking to leverage gold prices, the Market Vectors fund may be more your speed.
 
If this were a year ago, I'd prefer to invest in a wide range of gold-mining companies. But now that U.S.
interest rates are relatively high and showing signs of moving even higher, it would be a better idea to look at investing directly in bullion.
     
In a high-interest rate environment, miners are going to have a tough time expanding. Rising gold prices are not going to give many companies the leverage they need to expand fast enough to please investors.
 
While there'll still be some mining companies raking in big bucks as gold prices rise, there will be many more losing shareholder value. By investing in an index- tracking ETF, you are investing in the winners and losers by default. Unfortunately, the losers could easily cancel out the winners.
    
With so much attention being put on commodities lately, it is going to be a bumpy ride for a while. Prices will continue to rise, but there will be some strong corrections along the way.
    
So if you're looking for an easy, reliable way to invest in gold, I'd look to put some money in a Gold ETF. They are cheap and easy. But only invest in one that directly
tracks bullion prices.     

As a whole, I believe the gold-mining industry could very well experience some growing pains in the near
future. I'd keep my distance for now.


Regards,

James Woodburn
for The Daily Reckoning

James Woodburn is a writer and researcher for Smart Money UK. Smart Money UK's latest report on gold investment can be found here.