Gold ETFs (Exchange Traded Funds)


Investing in gold ETFs can be a nightmare to think about. There are many options on the market and ETFs are a relatively new entry to the markets as well. With the cost of gold rising so dramatically and with projected costs skyrocketing upwards even still (assuming the current economic projections are correct), now is the time to get started in gold. However, many people are put off by the extraordinarily high price of gold. For the average person looking to invest in gold without the prohibitively high entry cost, we’d strongly recommend looking into one of the many gold ETFs that are presently on the market.

Firstly, it’s important to understand the premise of an ETF. An ETF is much like a mutual or hedge fund. Essentially it is a pool of assets that has some underlying net worth. The initial net worth is then divided up into equal shares and sold on the market. Every day, these shares exchange hands and at the end of the day the total net worth of the fund is re-calculated. So, as a simple example, suppose there’s a fund with $1 million invested in gold, silver, and some stocks. This fund is split up into 1 million shares and has an IPO for $1 each. The stock trades on the first day and gold has a strong price surge. The stock ends off at $1.10, but the fund’s total worth is $1.2 million. Therefore each stock technically has a correct worth of $1.20. Clearly the closing price is undervalued, so the stock will likely open at a higher price the following morning.

The benefit of ETFs is that they allow you to diversify without worrying about the hassles of mutual funds. Mutual funds are slow and cumbersome to buy and sell. However, gold ETFs are quick and can even be traded in the same day. Everyone with a brokerage account can also trade ETFs as they are bought and sold the same way as stocks. There are two primary ETFs that you can look at purchasing. One, iShares Gold Trust, is an ETF that seeks to roughly track the price movements of gold. UK investors can take a look at a gold unit trust fund called Merrill Lynch Gold and General Fund. This fund also seeks to roughly correspond with the price movement of gold.

One might be wondering what is the advantage of choosing a gold ETF over physical gold or gold stocks. Generally it has to do with the quantity of the investment. Physical gold, if purchased in small quantities can be very challenging to sell and buy. There can be very high fees associated with its acquisition or disposal, and furthermore storage of your gold can be very hard (having 20 1-oz bars lying around the house would be giving would-be thieves a very easy way to steal about 20,000 GBP). Buying gold ETFs however is lightening fast and very easy to do. Similarly gold stocks are not the same as buying actual gold. You are buying a company that is related to gold, so the welfare of that corporation is not necessarily dependent upon the price of gold (although much like oil, these two are highly correlated).

Buying gold ETFs certainly has its advantages over other forms of gold. If you’re looking to invest in this precious metal, take the time to review a few different ETFs and carefully plan your purchase. Gold is absolutely necessary for any portfolio, however how you include it in your investment lineup can make all the difference in the world.

 Posted by at 6:47 pm