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ETFs for the Gold Bull Market

Commodities / Gold & Silver Stocks Jun 24, 2010 - 08:29 AM GMT

By: Ron_Rowland

Commodities

Best Financial Markets Analysis ArticleA little over a year ago I told you about Four Easy Ways to Trade Gold With ETFs. Since then, gold has shot up from below $1,000 to as high as $1,265.30 this past Monday. Is it going still higher? If so, you need to know how to take advantage of the trend.

Today I’m going to review some ways you can get involved in gold through easy-to-buy exchange traded funds (ETFs). Of course, you may want to have some actual gold coins in your possession, too. However, for larger amounts or short-term speculation, ETFs are usually the best way to go.


You can also play the gold market through gold stock ETFs, which are different from gold bullion ETFs. I’ll explain this in a minute. First, let’s look at what gold has been doing lately …

Gold Going through the Roof!

Gold languished for years in the 1990s but is quickly making up for lost time. As you can see in the chart below, it’s been a volatile ride. But gold prices are now higher than they were in the 1979-80 inflation panic.

Gold Chart

Are people really that worried about inflation again? No doubt some are. I think even larger forces are at work, though …

Economic power and influence is shifting to people in emerging markets who are not so eager to trust in paper money. They want to store their assets in something real — exactly how gold has been used for centuries.

Whatever the reasons, gold has definitely seen impressive returns the last few years. I can’t say how long it will continue, of course. But if you think the uptrend will go on, here are three ways to capitalize on it with ETFs.

Golden Idea #1: Gold Bullion ETFs

This category of ETFs is directly tied to the gold price. You put your money into the fund and the manager uses it to buy gold bullion, which is then stored in a vault.

The first such ETF was SPDR Gold Shares (GLD), which came out in late 2004. This was the first time U.S. investors had access to gold in this way, and GLD was an instant success. A few months later iShares jumped in with the very similar iShares Comex Gold Trust (IAU).

Thanks to being first — and maybe because of a more memorable ticker symbol — GLD is today far larger than IAU. Both are huge, liquid ETFs and have achieved their objective of closely tracking the daily changes in gold prices.

Some people dislike the idea of an intermediary coming between them and their gold, or they wonder if the gold is really there. If this describes you, then my answer is simple: Don’t buy a gold ETF. Buy your own gold coins or bars, and store them in a place you think will be safe.

A new ETF, however, tries to address some of these concerns …

ETFS Physical Swiss Gold Shares (SGOL) came out back in September 2009. This fund works very much like GLD and IAU. The main difference is that the gold is stored in bank vaults in Switzerland. GLD and IAU store their gold in London and New York.

So if having your gold in Switzerland makes you feel better, then you might prefer SGOL over the two larger alternatives. And you wouldn’t be alone! The sponsors of SGOL appear to have tapped into a niche market, having attracted about $500 million and decent trading volume.

Another way to take advantage of a gold bull market is through gold mining stocks …

Golden Idea #2: Gold Mining ETFs

The companies that explore, develop and operate gold mines are highly leveraged to gold prices. This is because their operating costs are largely fixed. Once you’ve located the gold deposit and built the facilities to extract it, almost every additional dollar you get for it goes straight to the bottom line.

Gold mining can be a high-profit business.
Gold mining can be a high-profit business.

There is a problem with gold stocks, though: They are still stocks. This means they respond not only to the gold market but to the stock market as well. When stocks enter a downtrend, gold stocks often fall right along with everything else.

Does this mean gold stocks are a bad idea? No, not at all. It just means they are a different kind of investment in gold. They can be a great idea if you know what to expect.

Unfortunately, you might not get any gold stocks by simply buying an ETF that represents “mining” or “materials” or “natural resources.” In most cases, these funds will have little or no gold company exposure. They tend to be more involved in base metals, steel, coal, and other such things.

If you want an ETF that focuses purely on gold mining stocks, here are three you can consider:

  • Market Vectors Junior Gold Miners (GDXJ)
  • Market Vectors Gold Miners (GDX)
  • PowerShares Global Gold & Precious Metals (PSAU)

As the names suggest, GDXJ concentrates on smaller gold mining companies while its big brother GDX owns the major large-cap gold stocks. Both can be a good choice. PSAU has performed well but is lightly traded.

Golden Idea #3: Leveraged Gold ETFs

If you want to get really aggressive, there are ETFs that offer leveraged exposure to gold. Leverage is a two-sided sword — it gives you magnified gains on the upside and magnified losses on the downside. Additionally, the daily reset of the leverage on these funds means that long-term performance will not be an exact multiple of gold prices.

If you understand how leverage works and are prepared to manage the risk, then here are two ideas to consider:

  • PowerShares DB Gold Double Long ETN (DGP)
  • ProShares Ultra Gold (UGL)

Both products provide 200 percent exposure to the daily moves in gold and gold futures. DGP has slightly better performance while UGL is structured as an ETF and does not have the exchange-traded note (ETN) unsecured debt structure of DGP.

Are you ready to be a gold bug? If so, this week I’ve given you three golden ideas how!

Best wishes,

Ron

P.S. Are you following me on Twitter? Check out http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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