Gold, once a hot commodity in the markets, is, at least for now, considered incredibly passé. ETF Trends editor Tom Lydon says that over 600,000 pounds of gold have been disposed of this year. He says that gold is out of favor for at least a couple of reasons: Central Banks aren’t as interested, and investors are currently looking more to back stocks and bonds, since both are doing relatively well.
Lydon, however, was quick to point out that gold isn’t gone for good, especially when investors will want to hedge against inflation and markets when the need arises once again. Meantime, investors may be opting to buy just a small amount of gold to stick in their portfolios.
A gold exchange traded fund is a commodity ETF made up of one principal asset: Gold. That said, the fund is usually made up of gold backed-gold derivative contracts, which means the investor doesn’t own actual gold. Instead, when a gold ETF is redeemed, an investor gets cash equal to the gold’s value.
A Gold ETF exposes the investor to gold’s performance. It also may serve as an industry ETF, exposing investor to the gold mining industry or providing foreign exposure.
Gold ETFs have their disadvantages. In specific instances, a Gold ETF may not come with the same capital gain tax breaks as more traditional ETFs. Also, there may be an asset management fee, which would make the return a little less than the gold price increase. Additional costs may also be involved, such as a commission or a brokerage free. Some gold ETFs can also be very illiquid, which can impact when they can be sold and bought.
Investing in Gold ETFs isn’t necessarily that simple. The SPDR Gold Trust exchange-traded fund (GLD) was one pretty hot ETF commodity for awhile. Yet, only “authorized participants,” and not regular investors, could redeem or create shares. These participants are typically securities market participants, such as registered brokerage firms (Goldman Sachs (GS), Citi (C), JPMorgan Chase (JPM), Morgan Stanley (MS), Merrill Lynch-Bank of America (BAC) and others), that have agreements with the sponsor and trustee. Meantime, regular shareholders don’t have redemption rights and the Trust doesn’t have to ensure the gold, meaning that it isn’t liable for damage, loss, fraud, or theft.
Critics have accused GLD, and the entire ETF industry in general, of offering investors “on-demand liquidity” that in certain instances are based an underlying assets that are a lot less liquid and that this can distort underlying market prices.
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