The world of precious metals investing is a dynamic one. Contrary to what some may believe, investing is never fixed. There are always new methods of putting money to work in the market. There are also instances where an older investment vehicle may emerge as the hot new successful investment method. It is even true that both the new and the old can come together to present a very innovative concept in investing. This is most evident in the new world of ETF gold trading.
The arrival of ETF gold funds definitely does create a new pathway for those wishing to put their money into the highly dynamic world of the gold market while also embodying a very unique approach that is emerging in popularity.
What are ETFs?
An ETF is an exchange-traded fund. Such a fund will be traded on the stock exchange in a manner not very far removed than how a traditional stock would be traded. The ETF can be comprised of stocks, bonds, commodities and so on. In this case, the ETF would be comprised of gold. As the name implies, ETF are traded over the course of a single day on the market.
What can be deemed a Gold ETF?
As most would correctly assume, this would be an exchange traded fund that contains only one asset. This asset would very obviously be the commodity of gold. What many will INCORRECTLY assume would be that the fund is made up of physical gold. This is actually not the case. There is no physical gold in a gold ETF. Rather, the ETF is comprised of gold derivative contracts which have been backed by gold. One way to describe the contracts within the gold ETF would be that they are the cash equivalent to gold. Regardless of how you look at what the contracts are, they derive their value from being backed by gold.
What would be the purpose of a gold ETF?
A flippant answer to such a question would be the prime purpose would be to make a profit through trading in gold derivative contracts. While this is an accurate assessment, it is not an answer that clearly defines how exactly the process works and what occurs. There is a strategy present and this strategy is the ETF must accurately track and reflect the current price of gold on the trading day. This is all achieved without actually buying and owning gold. However, profits can be earned from the gold market without making such a direct investment in the purchase of the actual precious metal.
Are there any distinct advantages to trading in a gold ETF?
The most obvious question that a person not familiar with these types of ETFs would be what would be the advantage of trading in an ETF. Another common question which would be asked is why anyone would necessarily wish to get involved with ETF trading. After all, if you wish to invest in gold why would you simply not just purchase physical gold in the traditional manner? Truthfully, there is nothing wrong with the traditional method of procuring and investing in gold. A gold ETF, however, does offer a few distinct advantages that will not only appeal to gold investors but also to those with an interest in day trading.
The most likely advantage would be the ETFs ability to hedge against the weakness of the dollar. Gold will commonly increase in value when the dollar is weak. Many will learn that their overall portfolio has to accept the risks associated with a weak dollar when hoping to make a profit with gold trading. To buy a gold ETF will aid in hexing the portfolio while selling can aid when concerns arise over the upside.
Hedging portfolios and investments can take on many different adheres. While most assume that the purpose of hedging is to protect the assets within a portfolio, there are other motivating factors behind employing a hedge strategy. Basically, any approach where risk can be diffused by using one investment to play off another can be a hedge. An example of this would be how a gold ETF can be used to hedge risk in a foreign market. There are counties where gold is the primary source of income and those making business investments in such a market could employ a gold ETF as a means of protecting asset risk if the price of gold drops unexpectedly.
A gold ETF is not just a form of commodity ETF. It is also an industry ETF. What this means is any investor wishing to gain access to a gold related industry such as mining could use an ETF in gold as the means of investing in the industry. Of course, it is possible to buy stocks in publicly traded gold related companies. There are quite a few gold mining companies that are publicly traded. An ETF may have an edge over this approach through offering a diverse portfolio of such stocks.
Not all aspects of gold ETFs are advantageous
It would be intellectually dishonest to state there are only advantages to gold ETF trading. A few disadvantages exist as well. Among the more common disadvantages would be the complex tax issues which can arise when trading. Also, those wishing to actually own gold will never do so with ETFs since they are derivatives and not actual commodities.
Track the well known funds
A word to the wise does exist for those weighing their options to enter into the world of gold ETF trading. This advice would be the notion that it is best to avoid rushing into make a purchase of an ETF. Instead, it is better to examine the more popular funds and watch how they move in the market.
To do this could be an excellent learning experience allowing a potential trader to make a more effective determination as to which fund to acquire.