GOLD MINING STOCKS AND GOLD MUTUAL FUNDS
When compared with investing in gold
itself,investments in shares of gold mining companies
have a number of advantages and disadvantages, depending
on your investment needs. Among the advantages are the
fact that most gold company stocks pay a dividend which,
dependent upon its magnitude and surety, can yield
current income from the investment. And generally, if
gold metal prices increase, earnings and often dividends
will rise.
You should also determine whether the company in
question is a pure gold play or whether it has some
degree of diversification. Diversification, as such, may
diminish the movement of earnings with gold price changes
but may, however, provide cash flow and alternative
earnings in times of low gold prices. Individual
portfolio requirements will dictate which factors are
most important.
An investment in gold mining stocks should be
monitored on a regular basis because ore bodies can be
mined out, unit costs can equal or exceed market prices,
and mines can be shut down.
As with all investments, there is an ongoing need
for timely portfolio supervision. If you can't or don't
want to do it yourself, it can be done for you by
investment in a mutual fund that invests in the shares of
gold mining companies. With such an investment, through
the payment of a fee you can gain a professionally
managed diversification of your gold mining stocks.
Gold Mutual Funds Offer Many Advantages
If you would like to make a modest investment in
gold mining stocks and are looking for the safest and
easiest way of doing it, the answer lies in mutual funds.
Why? First, easy investing. Call a mutual fund and
ask it to send you a prospectus. If you like what you
read, just send in your application form and check.
Second, you can invest in some funds for as little as
$250! Third, a gold mutual fund is less risky because
its risk is spread through its ownership of shares in
dozens of different gold mining companies. Fourth,
there's also a possibility of dividends.
But all investments related to gold mining are
investments in a business -- not in gold itself -- and
carry the normal business risks of any stock investment.
WHO DECIDES THE PRICE OF GOLD?
Gold is traded around the world and around the clock
with the price always changing back and forth between
London, Zurich, Hong Kong, Winnipeg, New York and other
major gold trading centers.
However, prices published in your local newspapers
are usually based on either prices issued at noon and at
the close of trading by New York's Commodity Exchange
Inc. (COMEX) or on the famous twice daily London "fixing"
by major bullion dealers there.
In a ritual carried out since 1919, each member of
the London Gold Market is represented at the fixing and
its representative is in direct communication with his
own trading room, while a representative of one of the
major bullion houses acts as chairman.
After considering the price at which gold has been
trading so far that day, the chairman suggests a price
which the gold market members communicate to their own
traders. The traders respond by telling the chairman
whether they wish to buy, sell or have no interest. The
chairman then suggests other prices until all buyers and
sellers agree on both price and quantity. At that point,
worldwide supply and demand comes into balance and the
chairman declares the price "fixed."
But immediately thereafter, traders begin to change
the price in accordance with the realities of supply and
demand in their own trading area.
GOLD AND THE IRS
A new Internal Revenue Service ruling may stir
thousands of coin dealers -- who stopped selling bullion
products in the 1980's because of burdensome reporting
requirements -- to once again sell bullion without fear
of running afoul of government regulations.
The new regulation "Revenue Procedure 92-103" states
that information returns filed on Form 1099-B are only
necessary when sales are equal to or exceed Commodity
Futures Trading Commission contract sizes. For gold
bars, the contract or sales size is 1 kilo (32.15 oz.)
with fineness of at least .995. For 1-ounce gold Maple
Leafs and 1-ounce gold Krugerrands the sales size is 25
coins. No other gold investment products are subject to
IRS reporting. Amounts for silver, platinum, and
palladium products are also detailed in the ruling.
Since a 1982 IRS ruling, it was widely assumed that
all retail bullion sales required a report to the IRS.
The cost and burden of that reporting, coupled with
increased government audits and rigid but arbitrary
enforcement, has caused perhaps as many as 5,000 small
coin dealers and metals brokers to leave the precious
metals bullion business in recent years, according to the
Industry Council for Tangible Assets which fought for ten
years to change the regulations.
Many of the thousands of coin dealers who stopped
selling bullion products out of fear, confusion and
uncertainty over the previous ruling should now feel
sufficiently confident to reestablish sales and service
to their customers.
The prospect of thousands of coin dealers and
bullion brokers reemerging as active sales entities for
bullion, bar and coin products can be viewed as a highly
positive development not only for the coin dealer
community but the precious metals industry as a whole.
