Weighing gold

Gold recently touched a 25-year high, and while it has backed off its peak, experts say a major decline is unlikely. Still, with money pouring into exchange-traded funds pegged to gold, you might wonder whether your portfolio could use a bit more sparkle.

There are plenty of good reasons to own gold. Like real estate and other commodities, precious metals can work as a hedge against inflation and serve as important diversifiers because they don’t move in lock-step with stocks and bonds. But at its current level, gold might not be such a great buy, and the volatility of its price makes it a dangerous bet for small investors looking to turn a quick profit.

“The worst reason to buy something is because you see it in the news,” said Michael Iachini, senior research analyst with the Schwab Center for Investment Research. “Don’t buy it because it’s hot, buy it because you think it’s a good investment for your portfolio. An individual investor should not be trying to speculate on the price of gold.”

Usually investors buy gold when they’re worried – about inflation, the value of the dollar, the stability of the markets or geopolitical events. But in the face of low inflation, stable bond yields and a stronger-than-expected dollar, gold has surged to 25-year highs, reaching $596.80 an ounce on Monday. And while prices may droop before going higher, many experts believe it could reach $625, or more.

Two relatively new ETFs, pegged to the price of bullion, offer a simple, low-cost way to get exposure without the extra hassle of storage of security. If you want pure exposure to gold, this is the way to get it.

More than $6.5 billion has poured into State Street’s streetTracks Gold Shares ETF (GLD) since it was launched in November 2004 – the first U.S. ETF to invest directly in gold bullion. The iShares Comex Gold Trust (IAU), launched in January 2005 by Barclays Global Investors, holds another $671 million. Both are tied to the price of gold itself; they buy bars of gold and keep them in a vault, so you don’t have to.

The other way to invest in gold, and precious metals in general, is to buy the stock of mining companies. If this involves more company-specific risk than you like, you could choose one of the actively managed mutual funds focused on this space. U.S. Global Investors Gold Shares (USERX) holds about 40 gold mining stocks; U.S. Global Investors World Precious Minerals (UNWPX) holds companies that produce not only gold, but also platinum and silver. Other no-load options with low expenses include Fidelity Select Gold (FSAGX), American Century Global Gold (BGEIX) and Vanguard Precious Metals and Mining (VGPMX).

When comparing your options, be mindful of expenses. Specialty mutual funds tend to charge higher fees, and those that invest in precious metals are no exception. In contrast, both the ETFs charge a relatively low 0.40 percent fee, but that advantage could evaporate if you make lots of trades.

And remember, the Internal Revenue Service defines gold as a “collectible,” which makes direct investments in gold subject to a higher tax rate – up to a maximum of 28 percent. This would not be the case for mutual funds holding gold mining stocks.