While traditionally investors might have bought gold bullion or jewellery, today it can be easier – and cheaper – to gain exposure to the gold price through other means.
One of these is ETFs. Like other exchange traded funds, gold ETFs can be bought and sold on major stock exchanges. There are broadly three types of gold ETF – those which invest in physical gold, those which purchase gold futures and those which invest in the shares of gold mining companies.
Sadly, the performance of gold miners does not accurately track the gold price over long time frames. This is largely down to the operational risks that miners face, plus their additional costs. Mining gold is no longer a cheap business! However, if you are trading the gold price over shorter time periods, these ETFs may still be worth a look.
Some ETFs will seek to copy the performance of a gold index by using futures, forwards and options contracts. Here the fund does not own shares or bullion, but will seek to mirror the performance of the gold price as closely as possible.
The pure gold play is represented by ETFs that buy and hold bullion in bank vaults. By acquiring shares in such an ETF, you are buying a share of that gold. This does not mean you can turn up at the bank to collect your gold, but the ETF stands a much better chance of tracking the gold price.
There are a number of widely traded gold ETFs on the market, including SPDR Gold Shares ETF (GLD), iShares Gold ETF (IAU), ETFS Physical Swiss Gold Shares (SGOL) and PowerShares DB Gold Fund (DGL). Other specialist gold ETFs are managed by ALPS Sprott (e.g. their Gold Miners ETF – SGDM), Van Eck (Vectors Gold Miners – GDX) and ProShares (Ultra Gold Miners – GDXX).
Ultimately, the measure of a good gold ETF is how close its performance is to the behaviour of the gold price. It is not trying to beat gold, but just deliver an accurate representation. It is a simple job to compare the performance of an ETF against the gold price over a particular time frame – three months for example.
All gold ETFs have to shoulder additional costs, be it trading costs, custody fees, or simply having to pay for all that bullion to be securely warehoused. Hence, no ETF will be able to provide an exact match, but the closer they can get, the better.
Take a look at our article that describes some of the factors that affect the price of gold and get to know the market before you decide to trade.