Investing in gold exchange traded funds is one of the easiest and cheapest ways to invest in gold bullion. Before gold ETFs arrived on the investing scene the only way to invest in gold directly was through buying physical gold in the form of gold coins or bullion or by trading gold futures contracts.
Buying physical gold can be expensive, as the spreads between the buy and sell rate can be very large, especially when buying small quantities. Then after this you have storage and insurance costs to consider.
Futures are another option for gold investors, but futures are traded on margin and the nominal value of even the smaller contracts is likely to be well into five figures. This may not be suitable if arn’t looking to invest so much.
So how do gold exchange traded funds compare?
Well, for many investors, they are probably the perfect solution. Many of them track gold with a high degree of accuracy. The only cost of investing in gold ETFs is the management fee charged by the fund. This is likely to be anywhere from 0.2% to 2% a year depending on the individual fund.
The management fees are often reflected in the net asset value of the fund (NAV).
How do the do gold ETFs work?
To explain this, we need to revert back to earlier in this article. Most gold ETFs either buy and store physical gold or buy gold futures contracts.
The gold ETF funds that buy physical gold bullion tend to track gold more accurately as the value of the gold holding is not affected by anything other than the spot price of physical gold.
A large gold fund would be able to get much better spreads when buying gold bullion than a small to medium sized individual investor. The relatively high nominal value of the gold futures contracts is not going to be any problem either for a large fund.
Why would anyone want to invest in gold?
One reason is pure speculation. From the year 2000 to 2010, gold prices have risen about 500%. Many speculators feel there is still plenty of room for gold to continue growing.
Fear of a crisis is another big reason. Historically gold prices have risen significantly when there is fear and panic across the financial markets. It is often referred to as the “safe haven” in times of crisis.
Gold is often seen as a US Dollar hedge. As gold is usually priced in US dollars, when the dollar depreciates, the price of gold often appreciates and vise versa.
Gold has historically been a good inflation hedge as well. One good example of this is in the late 1970s when there was very high inflation in many of the developed economies, gold prices increased massively.
What about leveraged gold exchange traded funds?
Personally, I’m not a fan of leverage. There have been so many talented traders who have failed because of using too much leverage. There are many funds that offer 2:1 leverage on gold. So if gold prices increase by 5% in a particular the week, the fund will aim to double that return. However, if gold prices depreciate, these losses will also be doubled.
Gold is a volatile commodity without leverage, so extreme caution is advised if you are looking to mix leverage with gold investing.
What is an inverse gold ETF?
An inverse exchange traded fund tries to mimic gold prices in reverse. What I mean by this is, if gold prices went down by 5%, an inverse gold fund would aim to rise by 5% and vise versa.
Are there any other ways to invest in gold?
One option is to buy stocks in gold mining companies. Some gold stocks do have a good deal of correlation with gold prices. However, they are highly unlikely track gold with anywhere near the same degree of accuracy as an ETF or ETN.
Where do I buy Gold ETFs?
Gold Exchange traded funds can be bought and sold just like normal stocks, through a conventional stock broker. If you need help finding a stock broker, feel free to look at my discount stock brokers page.