Gold ETF's -- Gold Mutual Funds

Buying gold funds can be a great way to access and participate in the gold market.  As with any mutual fund, however, there are risks.  

To own gold funds means to own shares of individual precious metal companies that are contained in the fund.  In other words, when you purchase a gold fund, you have essentially purchased net assets of gold mining companies all across the world. 

Gold Mutual Funds Risks

1. Purchasing a mutual fund that focuses on any individual sector such as gold, healthcare, or treasury bonds means that your participation may be limited to these individual markets.  Participating in non-gold investments to offset any over-concentration of gold funds may make good sense.  Diversification always makes sense to a long term investor in reducing the impact of the financial bubbles within your portfolio.
2. Inflation and deflation of the world’s money supply may increase or decrease the value of gold.
3. In the case of gold, national and local laws may play a significant role in the output or cost of the gold being mined.  Significant environmental laws in the last few years have added costs to mining companies who in turn have passed on expenses to their buyers.  Buyers refuse to absorb costs, and eventually costs incurred during the production phase end up at the retail level, if the metal itself ends up at the retail level.
4. Finally, investing in any stock mutual fund has its risks.  Individual companies (and the mutual funds that contain them) have economic risks, interest rate risks, and labor risks.  These are risks that are common to most businesses regardless of their product.
   

Gold Exchange Traded Funds

Gold Exchange traded funds (or Gold ETF’s) offer investors a different way to participate in the gold market without investing in gold mutual funds.

When an investor purchases gold ETF’s, they bypass ownership of mining companies and buy ownership of the actual metal itself.  Buying gold ETF’s removes some of the risks associated with owning precious metal mutual funds that contain precious metal company stock.

Gold ETF’s vs. Gold Mutual Funds.

Some thoughts on Gold ETF’s and gold trusts versus gold mutual funds include:

1. No company risks associated with ETF’s.  As an investor in a Gold ETF such as Ishares Gold Trust or GLD, the SPDR Gold Shares, you don’t have to be concerned with risks normally associated with owning company stock.  Such risks include labor risks, the risk of poor corporate management, and bankruptcy risk.
2. Gold ETF’s don’t have commissions loaded into the cost.  Depending on the share type, gold mutual funds often have a “load” built into the cost to pay the broker.  
3. ETF’s generally have lower expense ratios attached.  Expense ratios are costs paid to manage the fund.  Since Gold ETF’s aren’t actually a mutual fund, there are generally less expenses to be paid to operate the fund.
4. Remember, there are risks of owning Gold ETF’s as well.  Your risk is directly proportional to the market price of the Gold ETF purchased.  When the price of gold falls, your Gold ETF share price will fall accordingly.  This is not always true when investing in gold mutual funds that contain gold stock positions.  Gold mining companies may have hedging practices that protect the company’s value even when the market price of gold falls.  This procedure may protect the value of the mutual fund that holds the stock itself.

The largest Gold ETF, SPDR Gold Shares, houses actual gold bars.  Bars are physically stored by the custodian in its London vaults.  So, when you buy a share of this Gold ETF, you do not take possession.  Instead you receive ownership backed by the gold itself.  

In my opinion, these Gold exchange-traded funds are generally the preferred method to participate in the gold markets.  Direct purchase, lower expenses, and no company stock risk often make Gold ETF’s a great way to take part in gold metal investing.

 

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