When investing in gold, you can actually buy gold bullion and store it yourself. This is not exactly practical, however. You can also buy and trade in gold futures contracts or you could start investing in gold mining companies. This is complicated and risky.
The optimal solution for most private investors is to invest in gold through a gold ETF. But what are they and how do they function?
Gold ETF Storing Gold
Gold ETFs aim at tracking the price of gold, the most accurate way to do this is to buy actual gold bullion and store it. Some gold ETFs do this. The benefit, as mentioned, is that it is the most accurate way to track the price of gold. The downside is that it is not a flexible way to run an ETF and that storing and transporting vast amounts of gold is expensive.
Gold ETFs Investing in Mining Companies
Another way to gain exposure to gold is by investing heavily in gold mining companies. When the price of gold increases the value of gold mining stocks tends to rise as well. In fact, often the value of gold mining stocks will rise more than the value of the increase in price.
Investing in stocks, the ETF will avoid the hassle of storing and transporting gold. However, it will not track the price as accurately, since the value of the stocks will be influenced by a lot of factors besides just the price of gold.
Gold ETFs Trading Futures Contracts
Finally, many gold ETFs use futures contracts. This allows for a lot of flexibility. In fact, some ETFs, using furtures contracts, aim at doubling the return (or loss) of investing in gold. However, trading in furtures is complicated and the value of the shares of the ETF can deviate substantially from the value of gold.
Practical Solution
Investing in a Gold ETFs is a practical solution for those who want to gain exposure to gold. Which type to choose, depends on what you are looking for. Hopefully, after reading this, you will know what type you are interested in.
