Gold ETFs Glitter

Since 2001, gold and gold ETFs prices have risen steadily, albeit with some significant ups and downs, as investors flock to the perceived safety of the yellow metal otherwise known as the “barbarous relic.”  Gold ETFs like the SPDR Gold Trust (NYSEARCA:GLD) and the iShares Gold Trust (NYSEARCA:IAU) have become very popular investing vehicles for people who want to participate in the gold market without holding the physical metal.

Over the last ten years, gold prices have been supported by global central bank money printing and the seemingly never ending decline of the U.S. dollar.

In 2005, gold prices reached $500 for the first time since 1987. Just three short years later in 2008, gold prices reached $1,000. The main reason why gold prices took off so rapidly was the financial crisis of 2008. The crisis increased the demand for actual gold and gold ETFs.  Other sources of increased demand have been several central banks increasing their gold reserves, most notably, the Chinese National Bank, the Central Bank of Russia, and the Reserve Bank of India.

On December 7, 2010, gold prices reached a new record high of $1,431.60 per troy ounce. Conversely, the U.S. dollar experienced an all-time low to that date. These events occurred because there were uncertainties revolving around whether the economic recovery was sustainable, increasing inflation, and the possibility of corporate bankruptcies.

If gold intrigues you as a worthwhile investment, you may be debating about whether to invest in gold mining shares or in gold ETFs. Gold mining shares are stocks in companies that are in the business gold mining. These companies vary in size from multi-billion dollar companies that have large mines in Africa, Australia, Canada, and Nevada, to small exploration mining companies that are on the lookout for new areas to find gold throughout the world.

“Major minors” are those companies that are stable and whose profits will fluctuate based upon what the price of gold is doing. Smaller gold companies have to find gold before they can mine it and sell it. Smaller gold companies can be a worthwhile investment if the company is successful in finding a spot of gold and mining it. If these companies are not successful, however, shareholders can lose all of their investments.

Gold ETFs enable investors to buy fund shares that directly track the price of an ounce of gold. Major gold ETFs hold gold bullion to back those shares that are being traded on the exchanges. Gold ETFs can give investors a way to buy, sell, and trade the value of gold via their brokerage accounts. The advantage here is that investors of gold ETFs know exactly how their investments will perform in relation to the actual price of gold.

When the price of gold rises, those who have invested in gold ETFs will see their investments rise along with the price of the metal itself. Those who have invested in a mining company may see higher profits than those indicated by the price of gold itself. This varies depending on the company used, as some companies may have sold future production at a cheaper price or used futures to hedge the price of gold.

When gold prices are flat or falling, gold ETFs provide no growth potential, such as a dividend, to investors other than the price of gold itself. As a result, the ETF doesn’t do much when the price of gold is falling. A mining company can provide the investor with a good return on investment even when the gold price stays the same or falls in value. Shareholder value can be increased due to the payment of dividends or an increase in the production of gold. It’s important to note, though, that sharp declines in the price of gold can lead to substantial drops in the stock prices of mining shares, as well.

Gold ETFs:

The SPDR Gold Shares ETF (NYSEARCA:GLD) is the largest physically backed gold ETF in the world. It was originally listed on the New York Stock exchange in November 2004; it has traded on NYSEArca since December 13, 2007. Besides trading on the New York Stock Exchange, it is also traded on the Tokyo Stock Exchange, the Stock Exchange of Hong Kong, and the Singapore Stock Exchange.

The second-largest gold ETF, the iShares Gold Trust ETF (NYSEARCA: IAU), is not your standard ETF. This is because the Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool under the Commodity Exchange Act. Additionally, the shares of this ETF are not subject to the same regulatory requirements that mutual funds are.  The iShares Gold Trust ETF (NYSEARCA: IAU) was designed to generally correspond to the day-to-day movement of the gold bullion price. It is backed by gold and is held by the custodian in vaults throughout the world, including London, Paris, Toronto, New York, and elsewhere.  Investors may also choose to purchase and sell shares through their traditional brokerage accounts. Shares can be bought or sold at any time during the trading day.

ETFs like the iShares Gold Trust ETF (NYSEARCA:IAU) can represent an effective way for investors who couldn’t or wouldn’t participate in the market for physical gold.

Other popular gold ETFs include the ETFS Gold Trust (NYSEARCA: SGOL) that reflects the performance of the price of gold bullion minus the expenses of the Trust’s operations. It issues ETFS Physical Swiss Gold Shares in exchange for deposits of gold and distributes gold when baskets are redeemed.

The most popular gold miners ETF is the Market Vectors Gold Miners ETF Trust (NYSEARCA:GDX). This ETF attempts to closely resemble the movements of the price and yield performance of NYSEArca Gold Miners Index (GDM). The GDM is a modified market capitalization-weighted index that allows the investor exposure to publicly traded companies that are involved in gold mining from around the world. The GDX was first traded on May 16, 2006.

Bottom line:  Gold ETFs offer investors a wide range of choices for investing in the gold market, including gold mining shares or gold ETFs. Gold has been in a long term bull market and many analysts expect this to continue as central banks become net buyers and the financial world faces ongoing uncertainty in the post-crash reality.

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