How to Invest in Gold Without Breaking the Bank (GDX, GDXJ, PALL, PPLT)

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May 21, 2012 12:30pm NYSE:GDX NYSE:GDXJ

No question, having a small amount of precious metals in your global portfolio serves as sort of a “shock absorber” in times of crisis and uncertainty. Obviously, the most logical strategy is to be a buyer of gold when prices dip and the

opposite when prices are surging.

And with gold prices in a slump, I was thinking about adding a slug to my portfolio. But after doing some research, I’ve decided that there may be some better options right now…

Mine the Gap

First, take a look at the spread between gold miner shares and spot gold prices – near a 30-year low.

Spread between NYSE Arca Gold Miners Index and Spot Gold

Gold exchange-traded funds (ETFs) have fueled gold price gains over the past few years. Assets in bullion-backed ETFs have more than tripled during the last five years, reaching a record 2,410 metric tons on March 13, valued at about $140 billion, according to Bloomberg.

At some point, probably soon, this spread will narrow as investors look beyond the obvious risks in mining stocks and appreciate their substantial upside potential.

Gold stocks are trading at the cheapest valuations in about a decade. In addition, gold miners, especially small caps, are raising dividends to better attract capital flows from the ETFs and big-cap miners.

Market Vectors Gold Miners ETF (NYSEARCA:GDX), which tracks larger gold miners, offers only a 0.7% yield. But my recommendation, Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), which leans toward small- and mid-cap junior miners, offers about a 5% composite dividend yield.

It seems to me that these mining companies are dirt-cheap, with the large miners trading at around five times cash flows, and the juniors even less. GDXJ offers you a basket of these stocks, which is a better strategy than trying to pick and monitor one or two junior mining stocks.

Next, looking beyond gold, platinum and palladium have also suffered a sharp pullback, down about 18% since early March. Relative to gold, these metals are hybrids with precious and industrial value. Platinum is 30 times rarer than gold, used up in industrial uses rather than stored in vaults, plus it’s more difficult to mine.

The industrial uses of these two precious metals are largely in the auto business, so rising demand from auto companies is a key driver of prices. There are other uses as well, such a jewelry, glassmaking and the chemical industries.

ETFs for both of these metals increasingly play a key role in determining their spot prices. The Palladium (NYSEARCA:PALL) and Platinum (NYSEARCA:PPLT) ETFs are your best ways to add some exposure to your portfolio.

Take advantage of market weakness – but rather than adding some gold, why not diversify with some junior gold miners, blended in with a dash of palladium and platinum?

Good Investing,

by Carl Delfeld, Investment U Senior Analyst

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