The first gold ETF launched in the U.S. in 2004. Today there is over $90 billion of investor assets in gold ETF and gold ETN products focused on gold and gold-related companies. Features and benefits of these investment vehicles include:
Gold ETF funds provide exposure to physical gold or gold related stocks from the comfort of your own home. Once a brokerage account is established, investors can purchase these easily access gold markets.
Gold ETF products are priced attractively relative to mutual fund alternatives and the associated costs of buying and storing physical gold. Currently, the lowest gold ETF expense ratio is .25bps or one quarter of one percent a year.
Gold ETF products enable investors to invest in many unique areas like physical gold, gold mining stocks and leveraged and inverse gold strategies. Today over 22 products are available to U.S. investors.
Gold ETF funds have daily transparency of their holdings, allowing investors to know exactly what they own. In addition, physical gold ETFs have inspection reports done by third parties to audit the physical gold vault holdings and report back to shareholders of the ETF.
Gold ETF products trade on major stock exchanges like the NYSE Euronext or the NASDAQ and have second by second pricing. Selling a gold ETF is as simple as selling a stock, both of which can be done with a click of the mouse or a call to an advisor or online brokerage firm.
Gold ETF funds that own the stocks of gold-related companies track professionally selected indexes that are often designed with purity and liquidity in mind.
ETFs provide investors with efficient, transparent, flexible and convenient access to markets like gold that can be cumbersome to invest in.
ETFs provide cost-efficient access to physical gold and gold-related companies by virtue of their attractive expense ratios which are well under 1% per year.
The majority of ETF portfolios are transparent in nature, enabling investors to know what they own at all time. This allows the investor to make the most informed investment decisions.
ETFs trade on an exchange just like a share of stock. This allows the ETF to be flexible enough to bought and sold throughout the day, unlike other packaged products (e.g., mutual funds) that may provide end of the day pricing only. In addition, like a stock, buy, sell and limit orders can be implemented, giving the investor the flexibility of order choice.
Gold ETF products provide investors convenient access to physical gold, gold-related companies and gold investment strategies that may be harder to implement as an individual investor due to asset limitations or knowledge of markets.
Exchange traded notes, or ETNs, offer the advantage of eliminating any potential tracking error that ETFs may experience. ETNs are debt obligations issued by banks promising to deliver the specified return of a particular investment or investment strategy. ETNs are not required to physically own specific securities or collateral related to the investment, instead the ETN acts as a debt obligation of the issuing bank. Thus when considering an ETN, the credit rating of the issuer must be reviewed.
The Two Drivers Of The Price Of Gold
Since the dawn of time, gold has held a special value to humanity as astore of value in the form of currency and more recently as an investment. Here are two basic reasons to consider adding gold to an investment portfolio: limited supply and growing demand.
Gold is by nature scarce and expensive to bring out of the ground. In fact, the World Gold Council reports that only about 166,000 tons of gold has ever been harvested in the history of man. To put that number in perspective, all that gold could fill just 3.5 Olympic-size swimming pools. Limited supply of any commodity is a factor that is generally beneficial to prices.
In modern times, three areas drive the demand for gold: jewelry, Investment and technology/electronics. Jewelry demand is the largest source of gold demand but of late has declined in its overall share of gold demand. The decline in jewlery’s share of demand has likely been affected by the world economic crisis and its impact on discretionary spending. On the positive front, however, emerging nations with increasing standards of living and large populations like China and India, represent strong cultural demand for gold. This assures a continuing level of demand for gold jewelry and related valuables.
The second largest demand factor for gold is investment in gold bullion, bars, coins and funds like ETFs that are backed by physical bars of Gold. This area has grown dramatically in terms of overall Gold demand. It seems that the same global economic uncertainty that has hurt jewelry purchases has had the opposite effect on Gold investment. This is because as more currency is printed around the world, Gold becomes more attractive due to its inability to be so easily reproduced!
Finally, technology and electronics are increasingly using Gold in electronics. While these devices may use minimal amounts of Gold, the sheer amount of devices worldwide has grown this category of demand.
In conclusion, favorable supply and demand factors surrounding Gold have led it to appreciate over the last few years and appear to point to a continued investment appeal.
The Investment Case For Gold
Besides common sense factors such as supply and demand, there are a variety of investment characteristics that gold exhibits that are attractive.
Gold As a Hedge
Hedging, or trying to mitigate investment risk, is a common portfolio tactic using gold. There is long-term evidence that gold has acted as an effective hedge against inflation. Gold also has a strong history of being an effective hedge against the devaluation of the U.S. dollar. Finally, gold has often acted as a hedge for equity investors during quarterly periods of significant declines in the equity market.
Gold As a Portfolio Diversifier
Gold is an asset class that provides diversification to a portfolio due to lower volatility relative to various asset classes. This means that it is a more stable asset in terms of price sensitivity in relation to other investments like commodities, emerging market equities and U.S. small cap stocks, for example. Gold also provides an additional portfolio diversification benefit as it has a low to negative correlation to other asset classes like stocks, bonds and even commodities. It moves less or even in a slightly opposite direction to these asset classes, making it an efficient counterbalance in a portfolio. For more, see “Calculate The Impact of Adding Gold To Your Portfolio.”