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Precious metals mutual fund products have a unique place in the portfolio of investors. Some folks know very little about precious metals. Some may only know that it’s “advisable” to keep a small sum, say 5%, of one’s portfolio in precious metals at all times. Others may be fully aware of the full-on precious metals bull market. However, they may know very little about how and where to buy physical metal. Maybe they prefer to get involved in mining stocks for more exaggerated returns, but don’t know which companies to buy.
There are lots of options available to investors today. Apart from buying bullion and holding it personally at home, there are bullion storage programs. There are also bullion-backed ETF-type products aimed more at market participation in metal movements than warehousing metal for individuals. There are ETF products that are linked to groups of mining stocks as well, focused more on the companies that produce the metal rather than the actual metal in a vacuum. Finally, there are precious metals mutual fund products that allow people to tap various types of miners. Let’s look at all of the above.
Precious Metals Mutual Fund Fundamentals
Precious metals mutual fund potential is propelled by the worldwide disenchantment with fiat money systems. All around the world, countries are discovering that slaying the forests and firing up the printing presses is not quite the viable solution to sovereign debt crises, trade deficits, persistent recessions, and threatening depressions. The increase in the American money supply is downright disturbing. Simply put, it’s impossible to flood the market with additional dollars created out of thin air without greatly deteriorating the value of the existing dollars. In crude terms, if the printed money is to retain any value at all, items of worth should multiply as a factor of the increase of printed money.
This theoretical expectation may not play out in a one to one ratio, but we already have witnessed a decade of progressive flight to gold. The historic rise of silver throughout 2010 and 2011 indicates that the “poor man’s gold” is certain not to be left behind. People are wisely exiting paper money on a global basis and certain people groups are particularly buying precious metals en masse. Folks in India and China are routinely adding precious metal to their savings. It’s reported that miners are even taking some compensation in precious metal. Precious metals mutual fund products offer investors worldwide an option for investing in precious metals if they do not have ready access to bullion or else otherwise do not want to buy physical metal.
Precious Metals Mutual Fund v. Bullion Products
One point of clarification needs to be made about precious metals mutual fund alternatives as they relate to various bullion funds or bullion storage options. As more of a strict alternative to buying and holding physical bullion, some people opt to use a bullion direct program that will supposedly hold bullion for them. This can take the form of storage in a general pool or exclusive storage in a segregated or “allocated” account. There are a number of “certificate” programs for this as well. These are a step beyond something like the Public Bank Gold Investment, which is really just a tracking vehicle intended to be redeemed in the native currency.
Alternately, you can more or less “buy” bullion through an ETF aimed at tracking gold or silver. Popular products include SLV and GLD. The primary problem with these programs is that they are intended mainly for profit, not asset protection. If you did want delivery, you’d need to take physical delivery of a 400 ounce bar. Four hundred ounces of silver would be quite expensive. 400 ounces of gold would be insane. And what would you do with it? Plus, you can simply avoid the fees by owning the metal yourself, so that brings us full circle, as we’re back to holding physical bullion at home.
Precious Metals Mutual Fund v. Other Miner Vehicles
Precious metals mutual fund options allow you to tap into not so much the metal, as the companies that produce the metal. By doing so, you can take advantage of the benefits of mining stocks, such as leverage, market inefficiencies, and internal rates of return that are pretty unique to mining stocks in the face of rapidly rising spot metal prices relative to seemingly fixed operation costs. As with holding bullion, there are alternatives here as well.
Just as there are ETF vehicles related to bullion, there are also ETF vehicles related to mining companies. ETFs anchored to mining companies are nice in that they conveniently trade just like a stock. Accordingly, they sport real-time quotes, intra-day trading, and put and call options. Diverse products allow you to choose from large producing companies, such as with the GDX, or smaller junior resource companies, like GDXJ.
To offset all the niceties and convenience, the big problem with ETF products that relate to mining stocks is that they are wholly inflexible. These vehicles are tied to an “index,” which is where the group of underlying stocks comes from. For instance, GDX is anchored to the New York Stock Exchange Arca Gold Miners Index. For the most part, that may be fine. However, you get what’s in that basket of stocks, including the good, bad, and ugly. The portfolio of stocks is not actively traded, and so there is no inherent response to market factors or company news.
Precious Metals Mutual Fund Possibilities
The problem of a fixed basket of stocks is a problem that I view as insurmountable. Other than for short-term trades using options, I don’t have much use for ETF products. An alternative for those looking for active management of a basket of mining companies is to look at quality precious metals mutual fund options.
Precious metals mutual fund products offer the same flexibility as the ETF investment vehicles when it comes to choosing among larger producers and smaller exploration and/or development companies. On the producer side, a quality precious metals mutual fund alternative is the U.S. Global Investors Gold and Precious Metals Fund. This mutual fund is available to be purchased at the end of the trading day as the Net Asset Value (NAV) is established. Simply use the symbol USERX. If you want to spread your money out over some more potentially explosive opportunities, you can look at UNWPX. UNWPX is to USERX as GDXJ is to GDX. UNWPX stands for the U.S. Global Investors World Precious Minerals Fund. It has a large degree of overlap with the stated objective of USERX. The big difference is that it allots 20% of assets to smaller junior mining companies. The life-changing gains these companies can produce can make a substantial difference to your precious metals mutual fund and, thereby, your portfolio.
