How to Invest in Gold ETFs


Top Exchange Traded Funds
for the
Commodity and Its Producers



A handy way to invest in gold is to take up communal vehicles known as exchange traded funds (ETFs). The mission of the funds is to track the market for gold via direct or indirect means. In the upfront approach, a communal pool holds a stockpile of gold bullion. For the oblique mode, the custom is to hold the stocks of companies engaged in the mining industry by way of exploration, extraction or other functions.

This article examines the top 3 exchange traded funds for the gold market. The first pool takes the direct approach by amassing a trove of the raw commodity. Meanwhile the other two vehicles rely on the indirect tack by holding stakes in the equities of the leading firms in the field.


*     *     *


Since the dawn of the millennium, investors round the world have shown a growing interest in exchange traded funds as a way to participate in the gold market. A vehicle of this type is in fact a convenient and cost-efficient way to latch onto the uptrend of the commodity over the long range.

A communal pool based on a market index can provide a direct or indirect way to invest in the gold market. In the sections to come, we examine a selection of the top vehicles along with the benefits and drawbacks of each approach.

Direct Play on Gold Bullion


A popular way to participate in the gold market involves an index fund that holds a stockpile of bullion. To this end, the advantages of an exchange traded fund include the ease of purchase, efficiency of transactions, and cost-effectiveness in holding the asset.

To begin with a counterexample, consider the effort required to buy and maintain a stash of gold bullion. For one thing, the transaction cost entailed in procuring the metal in the first place is apt to be sizable. More precisely, the retail investor has to pay a hefty premium over the wholesale price of the metal quoted in the commercial market. The story is similar for the haircut taken at the end of the holding period when the time comes to dispose of the cache.

Between the initial purchase and final sale, the investor has to contend with another burden. The owner of the trove has to shell out a maintenance fee on a continual basis in order to keep the hoard locked up in a secure vault.

The hassles involved in owning physical gold can be slashed by turning to an index fund. In particular, a communal pool listed on a stock exhange is a dandy way to ride the upsurge of gold in the modern era.

For this type of vehicle, the standard-bearer lies in the SPDR Gold Shares which is listed in the U.S. The pool forms part of a larger family of financial products known as the Standard & Poor’s Depositary Receipts (SPDR).

The ticker symbol for the Gold Shares fund is GLD. As with any other ETF, the shares of the pool can be bought and sold through an equity account held at a brokerage house.

Exchange Traded Fund of Major Vendors


An alternative way to ride the groundswell of gold is to invest in the equities of companies in the mining industry. An example in this vein is a prospector or a miner of the precious metal.

On the downside, though, taking a position in a single firm comes with the hulking risk of a crushing loss. The breakdown of a company, along with the crackup of its equity, is in fact a widespread threat in the mining industry.

Given this backdrop, a safer tack is to trim the risk of a wipeout by investing in a bunch of companies in parallel. For this purpose, the instrument of choice is an exchange traded fund based on an index of mining firms.

The purpose of the Gold Miners Index (GDM) is to keep abreast of the large producers of gold and silver. The benchmark includes dozens of public companies listed in America, ranging from Barrick and Goldcorp to Newmont and AngloGold.

The Gold Miners Index serves as the backbone for an exchange traded fund called the Market Vectors Gold Miners. As the name suggests, the purpose of the pool is to track the price and yield of the equities covered by the GDM benchmark.

The index fund is itself an equity listed on the New York Stock Exchange. The security trades under the ticker symbol of GDX.

ETF for Junior Miners


As a rule, a small company can grow at a faster rate than a larger rival in any industry. For this reason, many an investor has a fondness for bantam firms.

To cater to this group of gamers, one yardstick of the mining industry deals with the smallish firms in the gold market. The name of the benchmark is as bulky as its members are compact: the Market Vectors Junior Gold Miners Index (MVGDXJ).

The yardstick comprises dozens of companies that focus at least half of their efforts on gold and silver mining. The lineup covers small and midsize firms engaged in prospecting or mining activities.

The ticker symbol for the corresponding fund is GDXJ. Upon its inception in November 2009, around 63% of the value of the portfolio was taken up by companies based in Canada. Meanwhile the U.S. and Australia made up the bulk of the remainder. To round up the list, a couple of percent was claimed by South Africa, along with a share of roughly 1% for each of China and Britain. 

Within the market index, the largest weights were assigned to Coeur d’Alene and New Gold. The next two biggies were Hecla Mining and Silver Standard Resources. Due to the usual turmoil within the market segment, however, the composition of the benchmark changed dramatically within the span of a few years.

The equities of junior firms tend to be a lot more volatile than those of their larger brethren. On one hand, the advantage of the smallish stocks is that they can soar to lofty heights in the midst of a bull run. By the same token, the small fry are prone to bite the dust in droves during the crash that always follows a boom in the marketplace.

As an example, consider the crackup of precious metals during a downturn in the commodity cycle. Amid the mayhem, the investors behind large companies end up losing their shirts. But things are much worse for the patrons of small firms, who could be said to lose their pants as well.

A lot of folks think of an investment in the stock market as a rough ride on a roller coaster. Yet the analogy does not go far enough where the gold market is concerned. The turmoil on the bourse as a whole is a gentle wave compared to the hairy swings within the mining patch.

A better analogy for raw materials – including the stocks of gold miners – is a rocket that blasts off and zooms skyward, then takes a nosedive and shatters to pieces. For this reason, the realm of mining in general is not for the faint of heart. Moreover the guideline applies with special force to the unstable niche populated by the junior firms.

Tips


Looking at the big picture, an investment fund is a communal rig for managing a pool of capital. Within this type of vehicle, the mission of an index fund is to replicate the performance of a market benchmark. An example of the latter lies in the price of gold bullion in the commercial market. Another sample involves the average value of the leading stocks in the equity market.

Further information on motley kinds of communal pools is available at MintKit Core. For instance, an article titled “Investment Funds” talks about the distinctions between index funds and ETFs as well as mutual funds and hedge funds.

In line with earlier remarks, an exchange traded fund is listed on a stock exchange. For this reason, the shares of an ETF can be bought and sold just like any other equity by way of a brokerage account.

In that case, an equity account is a precondition for investing in an ETF. The selection of a brokerage house, along with a trading platform, depends on the specific profile of the investor. A guide to picking a broker is available in a plain-talking primer called, “Best Broker for Online Stock Trading and More”.

Warnings


The price of gold is closely tied to the fortunes of natural resources in general. As an example, the market for raw materials goes through an endless chain of booms and busts in which each cycle lasts roughly 34 years.

The long wave of natural resources is merely one sample of a slew of patterns in the financial forum and the real economy. A survey of recurrent motifs in the marketplace is available at MintKit Core under the node called “Market Cycles”.

The price of gold can surge and swoon with alarming speed and scale. Worse yet, the equities of the companies in the field – along with the exchange traded funds that are exposed to the industry – are even more jumpy than the metal itself.

The flightiness can be traced to the profusion of wipeouts in the mining industry. To offer an inkling of the hazards in store, some veterans in the field estimate that only 1 in 5,000 projects in exploration manage to hit the jackpot.

Loosely speaking, then, just about every investment in the realm of prospecting is slated to flop. As a result, legions of investors end up with nothing to show for the heaps of money and legwork vested in their chosen ventures, not to mention the loads of anxiety and heartache encountered along the way.

Given the certainty of thrashing prices in the interim, coupled with the likelihood of utter ruin in due course, the sage investor should funnel only a minute fraction of a personal portfolio into the gold market. The allotment should be so tiny that the prospect of a total loss will not cause the punter to lose any sleep at any time.

Another shrewd tactic is to take out most or all of the profits from a position at least once a year. For instance, suppose that a stake in an index fund has ballooned by 40% within a single year. Then the happy camper could extract the entire profit and leave behind only the original amount that was committed at the outset.

Suppose that an investor adheres to this guarded policy year after year. In that case, the routine will serve as a golden goose throughout a bull run in the gold market.

Sooner or later, though, the commodity is sure to break down. When – rather than if – the market goes kaput, the canny player will lose at most the wad of cash put up at the beginning.

More Resources on the Web


The serious investor will want to learn a great deal about the gold market. For this purpose, a good place to start is to peruse a couple of articles hosted at Wikipedia.


The first of the write-ups above talks about the industrial uses of the yellow metal. Clearly, the nature and extent of the applications depend in large part on the growth of the global economy. In this context, a prime driver lies in the industrialization of the emerging countries round the world.

The second article presents a survey of gold from an investment perspective. As an example, the precious metal is a popular way to stockpile wealth within many cultures. The raw material may be molded into a variety of forms ranging from coin and bullion to jewelry and artwork.

As the millennium wears on, the buildup of wealth in the budding regions will continue to power the demand for precious metals in countries ranging from China and India to Brazil and Turkey. For this reason, a solid grasp of large-scale trends in the world economy paves the way for fixing up a cogent program of investment in ETFs dealing with the gold market.

Comments