How to Participate in Gold Properly

Gold continues to soar to new heights. June '10 contracts are currently trading at $1,245 in mid-afternoon trading on May 12. The last time gold traded at levels above $1200 was back in December 2009. Concerns in inflation in China and flight to safety amidst European fears have contributed to the current rise. But those who bought gold stocks back in December have not seen a comparable return, and many gold stocks are down 20 per cent since the high.

Purchasing commodity stocks to participate in a commodity's rise is a common error retail investors make. The main reason is that stocks are priced by company earnings, results, and management. Tying in the price of gold with a stock is fallacious reasoning. Theoretically, gold could continue to break new records everyday but if a gold mining company has hedged revenues or incurred large expenses, one would expect that stock to under perform.

So how can you participate in gold properly? The easiest way is to purchase the bullion itself, but at a cost of $1,245, one ounce isn't as cheap as it used to be. Secondly, your broker will often charge a spread on the purchase and sale, commission, and a safekeeping fee of a few pennies a month.

If this option is not viable, especially if you are a small investor with less than $10,000 to start with, consider purchasing gold exchange-traded funds (ETFs). ETFs are managed by large firms, such as Barclay's or Standard & Poors and mimic the movement of gold as close as possible. The most commonly traded and largest holder of gold is the S&P Gold Index [GLD:NYSE].

GLD is 10:1 against the real price of gold. GLD is currently at $122.07 versus $1,245.00. GLD is the largest holder of gold because every time you buy GLD shares, the fund must go out and purchase the gold. The fund has been on the market for over 5 years and its liquidity and simplicity has made it a very popular product.

Another added benefit is that it is options eligible, so you can use it to protect your recent gains, or speculate on the options at a much lower cost.

If you really wanted to have gold in your account, as is highly recommended by professionals, this is the cheapest and most efficient route. Make sure that it is in line with your investment objective and suitable for your account.

I purchased Kinross Gold several years ago, when gold was much lower, and my shares have not risen with the price of the commodity. If I could go back, I would have purchased the GLD shares instead, so take it from me. ETFs on commodities is a much better choice than picking an individual stock.