How to Invest in the Gold Cycle

Investing in gold involves several investment alternatives.

Stockbyte/Stockbyte/Getty Images

Gold and other investments historically vary in price over extended cycles. During the past 50 years, gold prices have exhibited cyclical lows approximately every eight years. However, a bull market can produce price increases over longer periods even when short-term prices decrease. For example, the 660-percent increase in gold prices from 2001 to 2011 was followed by a 40-percent decline in the next two years. Investors can participate in the gold cycle with at least four different investment vehicles. Regardless of their choice, they should anticipate significant price volatility in gold prices.

Gold Bullion and Coins

Buying physical gold involves investing in gold coins or bullion. A primary advantage of this strategy is that price changes are directly correlated to the price of gold. One disadvantage to anticipate is the need to insure and store the investment. For larger amounts of gold, arranging secure space for storage can often be difficult.

Gold Futures Contracts

Buying futures contracts is a leveraged approach to buying gold. This is considered a more speculative and risky investment strategy because of the leverage involved in commodity exchange products. Investors anticipating a decline in gold prices can sell contracts that will increase in value if prices decrease. Because gold futures have specific expiration dates, this is a time-sensitive alternative that does not provide a long-term investment in gold unless contracts are regularly rolled over into futures that expire at later dates.

Gold Mining Stocks

Buying common and convertible-preferred shares in gold mining companies provides more limited exposure to the gold cycle. Investors choosing this option are exposed to the possibility of management and political risks within individual companies. For example, gold miners operating in foreign countries can periodically experience political instability that interferes with mining. Even in more stable locations, gold mining financial results are subject to the uncertainties associated with finding substantial deposits of the mineral. Investors who are expecting the price of a gold mining stock to decrease can sell shares short and then buy shares back at a profit if prices decrease. However, selling short is a specialized and risky investment strategy.

Exchange-Traded Funds and Mutual Funds

Exchange-traded funds and mutual funds represent two similar approaches to investing in gold. Mutual funds and ETFs hold assets such as gold and gold mining stocks. Funds investing in physical gold handle storage so investors do not have to make arrangements for storing bullion or coins. Funds specializing in gold miners diversify the investment portfolio among dozens of gold mining companies.