How to Trade the Gold Exchange Traded Funds

April 10, 2009 | By | 1 Reply More

Up until the last few years the only practical ways for the retail investor to gain exposure to the gold market was to buy either the physical metal and/or coins or invest in gold mining companies.

Buying bullion and coins has three main problems for the investor to consider.

  • Of course they can be stored at home, but that gives rise to security problems and insurance costs, they can be stored in a safe deposit box or ‘bullion vault‘ where access can be a handicap as well as incurring storage charges.
  • Your bullion sales are limited to the weight of the individual ingots you own, they cannot be ‘sliced and diced’ to give you flexibility in the amount you wish to raise.
  • Thirdly, the average investor has no easy access to trade in the highly specialised gold and silver market and an additional problem occurs with delivery.

Coins are a specialised market but modern minted coins are valued on their gold content plus a premium, it is just a case of finding a dealer and accepting his mark up.

Playing the mining market can be a hazardous experience, mining companies seem subject to so many more risks than most other investments, geo-political, accidents, hedging mistakes, and in the case of juniors even some con artists!

On the other hand getting it right can lead to huge profits. Unless you are a specialist, this is not a route we would advise the average investor to take unless they stick with the giants in the business.

Launch of Gold Exchange Traded Funds

The first Gold Exchange Traded Fund (or GETF) was launched on the Australian Stock Exchange (ASX) as recently as March 2003. Known as Gold Bullion Securities (GOLD), each share then represented one tenth of an ounce of gold.

Now every major stock exchange lists one or more GETFs as they have become established as the easiest way to trade gold and its derivatives.

ETF Investing Advantage

The first and foremost advantage of investing in gold through an ETF is that they are traded in the same way as shares on the major world Stock Exchanges. There is now an option market in the more important funds such as the SPDR Gold Trust (GLD).

Gold Exchange Traded Funds can either be backed by their holdings of physical gold as in the case of GLD which is now the worlds sixth largest holder of the physical metal, just ahead of Switzerland, or track the spot or forward price, a basket of miners, etc.

Gold backed ETFs charge a small annual sum for storage, etc. and your brokerage costs will be the same as for any other share transaction. Their gold holdings are managed by dealing on the open market. e.g. The London Bullion Market, Comex in New York.

Before playing the gold market via ETFs be sure to check out and to consider with care what makes the fund tick, for example there are Gold Exchange Traded Funds that will trade short as well as long on the spot or futures price and even doubling up on the index moves. These ETFs do not have any underlying hard assets and can be called products of the derivative markets.

Gold, Silver and Platinum ETFs give the retail investor the easy option of playing the price of the metals, a basket of miners or a variety of trackers and additionally, for the more speculative minded, the opportunity of doubling up on profits (or losses) in short or long ETFs that follow the precious metals market.

Finally we should point out that there is now a trading vehicle that allows a retail buyer or seller to deal in any weight from a gram upwards or specify a sum to buy or sell either in US$, Euros or GBP. Bullion purchased is held in your choice of vaults in Switzerland, London or New York and selling involves no delivery problems to take care of. Visit bullionvault for full details.

Many observers, fundamental and charting analysts, media gurus and investment site tipsters are forecasting a rise in the price of gold over the forthcoming months, some even predicting $3000 and over, an ounce within two years. There are others that see gold as an outdated store of value and no longer a safe haven asset in the modern financial world who anticipate that gold will drop from it’s present level of circa $880 an ounce to below $600 an ounce and even much lower.

Carefully chosen Gold Exchange Traded Funds is just about the easiest quick in/quick out way to participate in this market whichever way you see the gold market playing out over the short or long term.

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