Overview: Gold ETFs Vs Gold

Is it the time to invest in gold or not?

After the first appearance of the ETF in 1961, it gained popularity in the world of investment due to its stock-like features, easiness, and low cost. It is a collective investment scheme structure; which means the investor can hire professional investment mangers, diversify more and benefit from economies of scale, much like mutual funds and stocks. It entered the U.S. market in 1993. Gold ETFs are designed to track the price of gold through a complex structure and backed by physical gold holdings in vaults.

How ETF works is simple: co-operations produce ETF shares, and they sell it to in bulk to brokers in blocks of tens of thousands. These brokers either hold these shares, invest in the ETF by buying and selling thus becoming a market maker, or sell them to individuals in retail. They are traded just like stocks; they can be sold in the future market, short-sell and margined.

Gold ETFs are commodity funds, which means they don’t track security indices and they don’t don’t invest in securities. That’s why don’t comply to Investment Company Act of 1940 in the United States. Nevertheless, they are affected as any other commodity by the performance of exchange markets and foreign exchange rates to some extent. They cost less than buying a gold ounce since some gold ETFs track the price of ounce fractions, i.e. 1/10 of an ounce of gold, and have lower share-holders related expenses.

Due to the increasing popularity of Gold ETFs and their huge volumes, they effects gold prices on the short-term instead of following it. Standard Bank wrote a report about the relation between gold prices and gold ETFs in April 30th.

Unlike gold, ETFs are perfect investment tool; it has a management team and a sheet balance, while gold is not an investment, it is “MONEY” and the safe heaven asset you liquidate to invest, plus it can be physically delivered.

Therefore, if you are looking for investing in gold, ETF is the answer. While gold is the long-term safe heaven that it has always been.