The precipitous fall in the price of gold from early September through the end of the year has caught the attention of most investors. Investors may be happy they were not in the yellow metal as others are wondering if they should continue to hold onto the commodity. (For more, see 5 Best Bets For Buying Gold.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

On Sept. 9, 2011 gold hit an intraday high of $1,923 per ounce and everyone, including myself, was looking for the $2,000 level by the end of the month. From that day on, it has been a struggle for gold to put together a sustainable rally. It has found some footing since hitting a low of $1,523 on Dec. 29, 2011 and it is now back above the $1,600 mark.

Buying into the Pullback
When I look at gold, there are two likely scenarios and both have the precious metal higher in the next year. If the situation in Europe gets worse, it will lead to a recession in many areas of the world and gold will become a safe-haven investment. If Europe situation does not lead to a global recession, and if slow but steady growth continues it should lead to a lower U.S. dollar and higher gold prices.

Therefore, the recent pullback should be an opportunity for investors to enter into gold at a discounted price. The two largest exchange-traded funds (ETFs) that offer up exposure to gold are the SPDR Gold ETF (ARCA:GLD) and the iShares Gold ETF (ARCA:IAU). Both will track the spot price of gold and basically mirror each other. The expense ratio on IAU is 0.25% and GLD is 0.40%.

Gold Miners
For investors that would like to take advantage of some possible leverage and want to gain exposure to the companies that get the metal out of the ground, there is the option of the gold mining stocks. Historically, the mining stocks will have a higher beta when compared to the spot price of gold. For example, if gold rises by 10% the miners historically will do better, and vice versa. This is not always the case, but can be used as a general rule of thumb.

The Market Vectors Gold Miners ETF (ARCA:GDX) is a great way to gain exposure to the gold mining sector without choosing an individual stock. The ETF is made up of mainly U.S. and Canadian miners (78%) and the two largest holdings are Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG). The expense ratio is 0.53%.

Another option for the investor that wants to take on even more risk is the Market Vectors Junior Gold Miners ETF (ARCA:GDXJ). The ETF is heavily allocated in Canada and Australia (86%) and is composed of 83 stocks with only one, Alamos Gold, making up more than 5%. The expense ratio is 0.54%.

For the investor that wants an individual gold stock, my choice is Royal Gold (Nasdaq:RGLD). The $3.89 billion company has held up much better than its peers and is quite unique. Instead of doing the actual mining, Royal Gold owns royalty interest in various mines around the globe. The stock recently pulled back to support at its 200-day moving average near $70.20 It looks poised to continue the trend higher in 2012.

The Bottom Line
As gold ran from $500 to nearly $2,000 an ounce, I heard investors complaining they needed a pullback to get into the metal. Wake up! Here is your pullback. By buying into gold when it is off nearly $400 from the recent high, you are increasing the reward-to-risk setup. And if one of my two scenarios comes true, investors will be happy with the opportunity in the future. (For related reading, see The 5 Best Performing Gold ETFs.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  2. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  3. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  4. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  5. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  6. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  7. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  10. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!