CNBC Stock Blog

18, 31 or 60? Age-Based Gold Investing Plans

Alix Steel

Owning gold is important, no matter what kind of investor you are or how old you might be.

The first thing to realize is buying gold is the same as making any other investment decision. First you have to figure out what kind of investment you are looking for: value, growth, conservative, or risky. Asset managers recommend that 3% to 10% of an investor's portfolio be in gold depending on age, risk tolerance and world view.

Gold Bars

"It's a question of portfolio protection. What sort of portfolio protection do you need?" says George Gero, vice president of global futures at RBC Capital Markets.

"Are you trying to maintain purchasing power? Are you trying to use some asset allocation away from what your normal portfolio is?"

Gold is not without risks but prices over the past 10-years have popped 336% from $282 to around $1,230 an ounce as investors piled into the precious metal.

The most recent 13F filling for the popular gold exchange-trade-fund the SPDR Gold Shares revealed that Eton Park Capital, a hedge fund a started by a former Goldman Sachs partner, bought 6.5 million shares in the second quarter. Paulson & Co., a hedge fund run by John Paulson, is the largest shareholder of the GLD at 31.5 million shares.

Gold-buying is becoming a fad among investors, risky and conservative alike, from hedge funds to John Paulson to everyday buyers like you and me.

Most every analyst can agree that gold serves as an inflation hedge and as protection against volatility in the stock market, but there are many theories on how to buy gold.

Try age-based gold-investing.

Investor: 18 to 30 Years Old

You're on your first, maybe second job, paying off debt, learning how to survive on your own. Maybe you're even trying to save money to buy a house, or maybe you just need groceries.

You also should be buying gold.

Typically gold-buyers in the United States have been "people 40 to 65, professional, college-educated upper-middle class, upper-income type people," says Jeffrey Christian, managing director of the CPM Group. But Christian notes as gold prices have rallied over the past decade, younger investors in China and Europe, particularly those worried about inflation, also became interested. In the second-quarter 2010, the World Gold Council reported that gold ETF demand grew 414% on strong buying from Germany, China and Thailand.

There are two ways to look at gold as a young investor: risk vs. available income.

A young investor presumably has a minimum of 30 years until he can retire and therefore can risk more, which makes gold stocks an attractive option.

Most analysts say that gold mining stocks can offer 2:1 leverage to gold's spot price, sometimes even 3:1 and typically lead the gold prices on the way up and the way down.

Spot gold has risen 9.7% in 2010 while Newmont Mining has popped 26%. Some gold stocks even offer the much-sought after dividend like Randgold Resources  .

Buying miners, though, is like being a stock picker. Just because the gold price rises doesn't mean that all miners see the increase immediately reflected in their bottom lines. An investor needs to weigh each stock on company by company basis. Kinross Gold , for example, has sunk 10% this year despite the pop in gold prices.

"There's a number of cost elements that are directly or indirectly related to [the] gold price and when [the] gold price goes up so do those cost elements," says Adam Graf, director of emerging miners for Dahlman Rose & Co.

Graf loves mining stocks and tries to stick to forward-looking valuation. "On a theoretical basis, if gold moved up $100 an ounce, what does the change in the current value do based on what the forward-looking cash flow should do?"

Among the mining sector there are hundreds of options from large-cap names like Barrick Gold and Goldcorp to smaller speculative names like NovaGold and Seabridge Gold .

Small-cap miners have become a trendy way to play higher gold prices. The stocks offer a big potential pay out but also come with big risks. Small gold companies tend to be explorers and producers. They are burdened with geopolitical issues, environmental setbacks and funding problems.

On the flip side, large-cap miners have cash flow and are in production but have growth issues. The more gold they mine, the more pressure they have to find new resources to supplement their output. Large miners are often forced to shell out the cash to buy a smaller company.

For younger investors looking for some sort of safety amidst this risk, the Market Vectors Gold Miners , a basket of large-cap miners, and the Market Vectors Junior Gold Miners , a collection of small gold miners, make attractive options.

The upside potential won't be as high but safety compared to risk could be a good combination for a long-term beginning investor. The GDX has risen 12% year to date while Barrick, its largest holding, rose more than 18%.

So one theory to consider as a young investor is bet big to win big over the long term. But the fact of the matter is that younger investors might not have a lot of money to spare. Christian says "in reality what happens is a lot of times the younger investors will actually increase their activity in the junior gold sector as they get older because they have more money."

Younger investors shouldn't lose sight of owning the physical metal. At, you can buy a gold maple 1/20 ounce coin for $99. This is three times as much as one share of the GDXJ at $30, but you can store it in your basement with limited hassle and risk.

Investor: 31 to 40 Years Old

You're on a career path, on your fourth job and can buy things. You probably own a condo or small house. Maybe you are married and are thinking about starting a family but haven't yet. You have some disposable income to play around with giving you more opportunities to take risks.

Senior and junior gold miners would definitely be an attractive option here such as a well-diversified company like Freeport McMoRan Copper & Gold . Freeport has gold exposure but its copper deposits provide even more risk/reward potential.

Copper is an industrial metal and is heavily correlated to global economic growth. The more people buy and build, the more demand there is for copper and the higher prices rise. The opposite is also true, which makes copper an extremely volatile metal.

Another option is buying futures on the Comex. This gives you the option of betting on where you think gold prices will be in one month or even 12 months.

Gero, of RBC Capital Markets, says that "futures fit into your life if you have extra income and if you have [a] short-term horizon and ... if you know what you can afford to lose in a short period of time because futures [are] certainly ... more volatile then securities."


Traditionally futures were reserved mainly for traders as the asset earned a bad reputation. Christian says "futures and options expire unlike stocks so that you have to pay attention to the market more."

But futures are still good portfolio allocators and can serve as protection against risks an investor takes on through gold stocks or ETFs.

Another even riskier gold trade is ETNs, or exchange-traded notes, a security that tracks an index. You give a bank money for a set amount of time and upon maturity the bank pays you a return based on the performance of what the ETN is based on, in this case the gold futures market.

Some of the more popular ones are UBS Bloomberg CMCI Gold ETN , DB Gold Double Short ETN , DB Gold Short ETN   and DB Gold Double Long ETN . ETNs are flexible, and an investor can trade them long or short, but there is no principal protection; you can lose all your money.

Oliver Pursche, manager of the GMG Defensive Beta Fund, says ETNs are a highly speculative play but are a "way to play futures without [buying] futures."

Investor: 40 to 60 Years Old

You are gearing up for retirement, maybe putting your kids through college and have less disposable income. This is the time when gold ETFs make the most sense.

There are three gold ETFs that are physically backed and track the spot price of gold: SPDR Gold Shares, currently worth $51.5 billion, iShares Comex Gold Trust , worth $3.7 billion with the lowest expense ratio of 0.25%, and ETFS Physical Gold Shares , the newest, which is worth $500 million. JPMorgan and Goldman Sachs are the largest and second largest holders of the SGOL, as of the second quarter, as hedge funds look for even more ways to diversify their gold holdings.

For each share of these ETFs you buy, you generally own the equivalent of one tenth an ounce of gold which is stored by a custodian HSBC, Blackrock and JPMorgan, respectively. If investor demand outpaces available shares then the issuer must buy more physical gold to convert it into stock.

Conversely, when investors sell, if there are no buyers, then gold is redeemed and the company must then sell the gold equivalent.

Gold ETFs are not owned for leverage, but simply as a vehicle to own gold. Keep in mind that gold ETFs are taxed at a collectible rate, 28%. You get taxed as if you are profiting off of the physical metal even though you just own a paper representation of gold.

If you want the opportunity of redeeming your shares for gold, another option is Sprott Physical Gold Trust , which launched in February. This closed-end mutual fund gives investors the option of trading in their shares for 400-ounce gold bars. An investor can obtain physical gold on the 15th of every month, although the holder has to make transportation and storage arrangements.

However, the PHYS trades at a hefty premium, as much as 13% to 14% to the underlying price of gold. Eric Sprott, CEO of Sprott Asset Management, argues that although investors have to pay up for the product they don't have to deal with counter-party risk. The gold is held by the World Canadian Mint, which is not a leveraged financial institution and thereby sidesteps some of the associated risk.

You are retiring and setting yourself up for the next phase of your life. The biggest question you have to ask yourself at this stage is what will the gold be used for? Is it to have to pass on to your family? Do you need it to supplement your Social Security or is it a fun investment for a rainy day?

Most likely you will want to take on less risk and buy gold in case of emergencies or to pass on to your family, which means physical gold is your best bet. You can buy gold from various Web sites and store it at home in a safe or at a bank in a safety deposit box.

Another option is to use gold dealer sites like or, which buy, store and sell the gold for you. All these options, with the exception of storing the gold at home, require fees, but limited counter-party risks.

There are some external factors to watch out for. First, scrutinize how much a dealer is charging you for your gold item. A typical premium is 10% which means the gold price must rise 10% from when you buy the gold for you to break even on your investment. Use this simple equation (below) to avoid a lot of heartache.

Premiums can run as high as 75% for percentage ounce coins and rare coins where investors seldom recoup their money.

Next, make sure you actually own the gold you think you do. If you buy gold from a bank and the bank stores it for you, you may be purchasing unallocated gold.

"Unallocated gold came along because it was a way for the banks and some of the big refiners to sell gold to investors, keep it in their vaults, but actually work it for their inventory," says Adrian Ash, head of research for the If you buy unallocated gold, you are a creditor of a bank. If the bank goes belly up, you have to wait in line with everyone else to get paid.

To mitigate these risks, avoid free gold storage, says Ash. "Just beware if someone says: 'I'll look after the gold for you, but I'm not going to charge you for it.'" If the deal seems too good to be true, it probably is, says Ash.

Regardless of how old you are, consider gold jewelry as a long-term investment. Most jewelers will buy your old gold and give you cash, which makes this area of the gold market one of the most liquid.

If you're buying gold jewelry for yourself or someone else, take a bit of extra time and find the best grade available to ensure the piece retains its value over the years. Using a spot price of $1,200, an 18-carat piece of gold jewelry is worth about $152.

The gold price has risen from $35 to an intra-day high of $1,265 an ounce in the past 42 years. Although physical gold doesn't offer dividends or huge short-term returns, it does provide investors with a "safer" place to put their money, its just a question of how to buy.


Disclosure information was not available for Steel or her company.