If you looked at what the price of gold has done over the the last three years, you could not be blamed for thinking that it would take a brave or foolish investor to consider putting any money into this precious metal.
Some gold funds plunged by as much as 80% and the price of gold fell 35% over a three-year period, but if you had bought into gold at those dramatic tipping points, you would have prospered recently as market sentiment has shifted in light of recent turmoil in the financial markets.
Gold has always been viewed as a decent hedge when stock market investors start to get nervous about a string of gloomy economic forecasts and unexpected events. The beginning of 2016 has been a chastening experience for many investors with trillions shaved off valuations, triggered by events in China and a general backdrop of political and economic uncertainty for the year ahead.
Having set the scene for the coming year and painted a picture of fluctuating valuations and market volatility, it is also necessary to understand what is going on in the gold-mining industry and how it has reacted to falling demand and prices.
The gold-mining has undergone a period of restructuring, which is not dissimilar to what has happened in the oil industry, which has also had to react to falling commodity prices and lower margins.
Gold producers can only give themselves the best chance of gaining a competitive advantage over their market rivals, if they are able to demonstrate and deliver a high level of cost-efficiency and keep production costs to a minimum.
These goals can only realistically be achieved through a period of restructuring and as has happened in the oil industry, many small players have seen their market share squeezed as a result of their cost inefficiencies and a lack of resources to be able to compete in a sustained low-price environment.
This period of consolidation has resulted in a number of operators becoming leaner and giving themselves more opportunity to become profitable, especially if the price of gold moves upwards and they can benefit through lower operating costs and better margins.
With the usual caveat that the following funds are just suggestions and not investment advice, based on a strategy for those considering how to invest in gold in 2016, here are some investment funds that you may wish to look at.
1) First Eagle Gold Fund Class C
The average return in the last five years of -18.72% is hardly likely to have you salivating at the prospect of making a big return on your investment, but this fund has done better than plenty and if you believe that the tide has turned for gold, the fund offers a good spread of stocks and physical bullion.
The fund includes a portfolio of gold-mining finance companies and operating firms who have a spread of long and short-term gold mines. A little over 20% of the fund’s assets are physical gold and silver bullion and it claims to be very cautious in its considerations of capital, operational and geopolitical risks associated with investing in gold directly and also gold-related securities.
2) Franklin Gold and Precious Metals Fund Advisor Class
You will find all of these funds have been in negative-return territory for a the last five years and its annual return comes out at -24.11%, which is again better than many.
One reason why you might want to consider this fund is that it adopts a no-nonsense research-driven approach that is concentrated on top-quality companies who can boast attractive production profiles combined with robust reserve bases and active exploration programs in place.
Almost 80% of this fund is invested in equities of gold producers and the portfolio is heavily weighted towards companies from North America and Canada. This fund is therefore not as dependent on the price of physical gold, although it is of course relevant to demand and could be well placed if more investors and consumers help to push prices higher and help to increase productivity levels.
3) American Century Global Fund Investor Class
If you are looking to generate an income from your investment, this fund seeks to achieve this by investing in companies actively engaged in mining,fabrication, processing, and distribution of gold.
The fund has achieved an average annual return of -23.99% and the portfolio is weighted towards gold producers based in Canada, who account for about 66% of the total allocation and U.S gold producers currently account for 12% of the funds assets.
One point to consider about this particular fund is that its top five holdings represent close to 40% of its total holdings, which could result in greater price volatility for the fund if these stocks perform poorly, unless of course they have chosen the right ones to prosper from a recovery in gold in 2016 and beyond.
Gold mutual funds are an alternative option for investors who are reluctant to put their money directly into physical gold and represent a slightly more conservative approach than some other ways of investing in gold such as gold exchange-traded funds or junior gold stocks, which is definitely a boom or bust option, and can result in potential triple-digit gains or losses if exploration plays don’t reap positive rewards.
Gold itself is still not a speculative asset in general terms despite the volatility in prices during recent times, but as part of your portfolio, you may well benefit from a patient and strategic involvement through a suitable fund, which may well display the green shoots of recovery if the markets continue to react adversely to economic and political events.