With the gold market in bullish territory for several years now it’s no wonder so many investors are flocking to the yellow metal. However owning gold bullion is not always the most practical way of participating in the gold bull which is why the gold ETF has become widely popular among savvy investors. Now there are many different funds that call themselves ETF gold funds yet they are not all alike. In fact, there are actually numerous ways the funds are compiled that can greatly affect the different investment strategies that a potential gold investor may employ.
Standard Gold ETFs & Futures
The most straightforward funds will actually possess a related amount of gold bullion with each share usually being equivalent to about 1/10 of an ounce of gold. In general, these funds will keep track of fluctuations in gold price with precision. Some of the funds that could be categorized as this are the SPDR Gold Trust and iShare COMEX Gold Trust.
Aside from the gold ETF’s that invest directly into bullion, you will also find accounts that invest in futures instead of physical gold assets. These funds usually do a decent job of following price changes and the most noteworthy gold ETF futures is the Power Shares DB Gold Fund.
Precious Metals Index Funds
There are other funds that will follow the changes in the NASDAQ OMX Gold and Precious Metals Index; Precious Metals ETF and Power Shares Global Gold are two examples. Instead of tracking gold price, these funds track the accomplishments of the companies that have gold and precious metal operations. There is no underlying gold associated with these funds, and instead they are built upon common stocks and, therefore, have no actual investment in gold and may vary wildly from the actual fluctuations in gold prices.
Leveraged Gold Funds
Also available to you are leveraged gold ETF’s, like ProShares Ultra Gold, that claim they will offer you 2 to 3 times the daily return of changes in gold prices. They are able to accomplish this be heavily investing in derivatives that may include options, futures, forward contracts, and swaps. Like all leveraged positions, the returns may be significantly different in either direction from prices and do not always match investors goals.
In fact I’d say leveraged funds like a 2x gold ETF are really only good for very short term trading sessions (as in one to two days). The primary reason for this is due to the fact that these types of funds are compounded daily, which can very easily annihilate your portfolio if left for the long term.
Lastly, if you are pessimistic about the market or want some downside protection, you can invest in an inverse gold ETF. Many of these options will offer nearly perfect negative correlation to asset-backed ETF’s; some examples of these are the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold and the PowerShares DB Gold Short ETN. Of course you could also simply short a long gold ETF with sufficient liquidity such as GLD on the NYSE to achieve the same result.