If you're new to investing in gold, the SPDR Gold Trust (NYSE Arca: GLD) is a good place to start.
The SPDR Gold Trust is an exchange-traded fund (ETF) that tracks gold prices. It holds 23.8 million ounces of physical gold - worth $28.7 billion - in London vaults of which HSBC Bank Plc. (NYSE: HSBC) is the custodian.
Gold ETFs like the SPDR Gold Trust allow investors to take advantage of the unique characteristics of gold without having to buy an ounce of physical gold coins or bullion. While holding shares in the fund does come with its cost - a 0.4% expense fee to cover administrative overhead, and a 28% tax on long-term capital gains - it eliminates the burden of storage on the investor's part.
You buy ETFs like you do stock in a company. The fund will issue shares against the value of its gold holdings. The SPDR Gold Trust rebalances its portfolio and shares to track gold price movements as accurately as possible.
The SPDR Gold Trust is also a good opportunity to profit from gold price movements without having to pay the full price for physical gold. Rather, each share is worth one-tenth the value of one ounce of the yellow metal.
The SPDR Gold Trust doesn't have the same advantages of some of the quirkier gold ETFs. You can't redeem your shares for gold bars like you can with the Sprott Physical Gold Trust (NYSE Arca: PHYS).
But what it does offer is a simple entry into gold investing. It's the most actively traded, liquid gold ETF out there.
And with the risks that exist in today's market, you can't not afford to own gold in some form or another...
How SPDR Gold Trust and Other Gold Investments Help Your Portfolio
Gold doesn't offer future cash flows. That means it has no intrinsic value and its only profit potential would come from capital gains. Gains that are further taxed at 28% - at the collectables tax rate, not the 20% long-term capital gains tax for stocks.
Many of gold's critics will use this to belittle the value of investing in gold.
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And don't get us wrong; for most investors, it makes sense to have the bulk of their portfolio in stocks.
But stocks aren't always rising. Broad sell-offs and prolonged bear markets do happen - every five years on average.
This can take a bite out of the even the most financially sound and well-managed companies' stock prices. That's where a gold investment like the SPDR Gold Trust comes in.
"Gold is a critically important risk management tool that can help dampen your portfolio's overall volatility and also take the sting out of global uncertainty," Money Morning Global Investment Strategist Keith Fitz-Gerald said.
But contrary to popular belief, gold is not an inflation hedge. And while it is not correlated with stock price movements and has potential to move against falling equity prices, that's not gold's biggest draw either.
Here's what role an investment like the SPDR Gold Trust will play in your portfolio...
How the SPDR Gold Trust Fits into Your Portfolio
The main allure of gold, and one that is often overlooked, is that it protects against losses in your bond holdings.
"Gold is not correlated to inflation, it is more directly correlated to interest rates," Fitz-Gerald said. "And interest rates are, in turn, driven by inflationary pressures and global risk, especially in recent times."
As rates rise, the value of your bond holdings will fall. A solid gold investment like the SPDR Gold Trust will protect against those losses, provided you follow these two gold investing strategies.
The first is to make sure you invest 10% of the value of your bonds in gold investments. If you have $10,000 in bonds, invest another $1,000 in physical gold or a gold ETF.
Then make sure to rebalance each year to maintain that ratio. If your bonds appreciate to $11,000, boost your gold holdings to $1,100. Do the opposite if prices fall by shedding your positions.
More on Gold Investing: Money Morning recently detailed for our Members the importance of owning gold now - and delivered a two-part "cheat sheet" that outlines the right amount of gold for your portfolio. You can get that gold investing guide - for free - here.
Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.