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Trading gold with ETFs


For hundreds of years, investing in gold has been the preferred market choice in times of uncertainty, a substitute way of keeping money. 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 Gold ETFs.

Gold 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.

A choice of Exchange Traded Funds

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.

These 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.

How to invest in Gold ETFs

Speculative investment is becoming an increasingly large part of gold buying and has the capacity to override the effect on the gold price from simple supply and demand for the physical metal.

Over the last few years pension funds have increased the amounts of gold they hold in their portfolios as a way of dampening the effect of drops in share and bond prices, and this trend is only likely to continue.

Gold Exchange Traded Funds have become a massive source of demand for the metal, almost rivaling demand for gold bars. Investors can buy and sell these every day using the same brokerage account used to buy and sell shares or active funds. If you are living in the UK, you can use ETFs inside your ISA or SIPP

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.

Here at The Armchair Trader, we feel that ETFs represent one of the simplest and cheapest ways to invest in indexes and commodities without opening a leveraged Contracts for Difference or spread betting account. Take a look at our broker directory to find a platform that gives you access to ETFs

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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