Gold ETFs offer investors a cost-effective, diversified alternative that invests in gold-backed assets rather than physical commodities. Commodity funds invest in commodities or primary agricultural products, so-called commodities. These funds invest in precious metals such as gold and silver, energy resources such as oil and natural gas, and agricultural goods such as wheat. Commodity funds can also invest in the companies that produce these commodities.
While gold ETFs offer a flexible way to gain exposure to this asset class, buying gold ETFs comes with risks. Other things being equal, an investor might prefer to buy a 10-year government bond as gold if the real yield on 10-year government bonds is 2% and the yield on gold or silver is zero. According to the World Gold Council, it takes a long time for gold explorers to put new mines into production and find new gold deposits. By investing in gold ETFs, investors can invest their money in the gold market without having to invest in the physical commodity
.
Although gold futures contracts allow investors to buy and sell gold at their own discretion through online trading platforms and full-service brokers that offer futures trading, trading gold futures carries a certain level of risk. That’s because gold ETF managers don’t invest in gold because of its numismatic value, nor are they looking for collector coins. The SPDR Gold Trust ETF was touted as a cost-effective alternative to owning physical gold or buying gold futures. Gold ETFs can expose investors to liquidity-related risks, i.e. risks associated with how easy gold ETFs are to be bought or sold on the market and converted into
cash.
Investments in silver and silver mining as well as in gold and the gold exploration industry involve additional risks. Since gold itself does not generate any income and there are still expenses that need to be covered, ETF management is allowed to sell gold to cover these expenses. The difference between gold ETFs and gold futures is that, on the one hand, gold ETFs offer investors a cost-effective, diversified alternative to investing in gold-backed assets rather than in physical commodities. Gold futures, on the other hand, are contracts between buyers and sellers that are traded on centralized exchanges, where the buyer agrees to buy a quantity of the metal at a fixed price at a fixed future date. For example, many gold stocks have fared worse than the price of gold over the years due to mine development cost overruns, mismanagement, and excessive indebtedness
.
Despite their differences, both gold ETFs and gold futures offer investors the opportunity to diversify their positions in the metals asset class. Although the expense ratio has meant that the price of SPDR gold stocks has fallen slightly below the price of gold in the long term, the price can be worthwhile compared to alternatives.
