Gold ETFs: Paper vs. Bullion
Your How-To Guide for Investing in Gold ETFs
Gold is one of the most important investments to own — especially now.
Gold prices have been trading around $1,100 an ounce for a few weeks. But long-term trends point to gold prices over $2,000... $3,000... maybe even over $5,000 an ounce. These trends include:
Weakness in the U.S. dollar
Growing investment demand
Cyclical bull market
Ten years ago, it was difficult to invest in gold without holding the physical bullion. But the development of the gold ETF market in 2003 changed all that.
Today, one of the easiest ways to invest in gold is through Exchange-Traded Funds (ETFs). Gold ETFs are an efficient way to invest in gold without dealing with the troubles of holding the physical metal, such as storage.
Gold ETFs are traded just like shares of stock. You can buy and sell a gold ETF just as easily as shares of any company. And they trade on major stock exchanges including New York, London, and Sydney.
It's important to note, however, that all gold ETFs are not created equally. Some gold ETFs buy and hold the physical bullion, while others invest in futures contracts.
The physically-backed gold ETFs will track the spot price of gold more accurately. Physically-backed gold ETFs include SPDR Gold Trust (NYSE: GLD) and iShares COMEX Gold Trust (NYSE: IAU). These ETFs store physical gold in secure bank vaults.
Gold ETFs that track the futures market will following gold prices very closely, but may deviate due to backwardation and contango in the commodity futures markets. Gold ETFs with that track futures contracts include PowerShares DB Gold Fund (NYSE: DGL) and USB E-TRACS CMCI Gold Total Return (NYSE: UBG).
Typically a small commission is charged for trading gold ETFs and a small annual storage fee is charged. The annual expenses of the fund are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time.
Despite the fees and expenses, gold ETFs have become one of the most popular gold investments.
The World Gold Council reported that the world's total gold ETF market grew 85% relative to 2008.
Other precious metal ETFs have exposure to gold. These precious metal ETFs include the Central Fund of Canada (AMEX: CEF), which is backed by gold and silver bullion. Both the PowerShares DB Precious Metals Fund (NYSE: DBP) and iPath Dow Jones-UBS Precious Metals ETN (NYSE: JJP) have exposure to gold. These products track futures contracts to follow the price of a basket of precious metals that is tilted heavily towards gold.
For investors looking for leverage, Van Eck offers the Gold Miners ETF (NYSE: GDX), based on an index that provides exposure to publicly-traded companies engaged in mining for gold. Another option is the Junior Gold Miners ETF (NYSE: GDXJ) also from Van Eck. This fund focuses on equities of small and mid cap gold companies.
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Editor, Wealth Daily
Investment Director, Hard Money Millionaire
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