Posted on 31 July 2012. Tags: Physical Gold ETFs
Physical Gold ETFs are Exchange Traded Funds (ETFs) that offer some distinct advantages over gold ETFs that invest in gold futures contracts. Physical Gold ETFs are ETFs that are valued based upon physical gold that is held by the ETFs in warehouses, rather than the value of gold futures contracts. An investment in Physical Gold ETFs is a direct investment in gold bullion.
Many gold investors prefer to hold physical gold bullion because they invest in gold as a hedge against the meltdown of the world economy and fiat currencies that are backed by debt-ridden governments. While investing in gold via Physical Gold ETFs does incur some minor fund management fees (approximately 0.50%), these fees are justified by the fact that the physical gold has to be stored safely in warehouses. If an investor brought physical gold and took delivery of it, the investor would have to figure out a way to safely store the gold, which often involves a secure location that charges fees.
There are two primary advantages to investing in gold via Physical Gold ETFs versus buying gold ETFs that derive their value from gold futures contracts. First, gold futures contracts do not always perform in the same manner as the underlying price of gold. Gold futures based ETFs can lose value even when the price of gold remains unchanged, due to the nature of how gold futures trade and lose value as they approach their expiration date. Second, gold futures contracts buy contracts that give the ETFs the right to buy gold, but do not guarantee that they will be able to secure the gold in the event of a financial crisis. Investing in Physical Gold ETFs negates these two issues since they are valued on the actual price of gold and hold physical gold bullion to back up the value of the ETFs.
It is important to read the prospectuses issued by gold ETFs to ensure you are investing in Physical Gold ETFs. The following are two popular Physical Gold ETFs.
The SPDR Gold Shares (Symbol: GLD) is the most popular of the Physical Gold ETFs. GLD seeks to replicate the performance, minus expenses such as storage and management fees, of the price of gold bullion. GLD holds physical gold that is in equilibrium with the amount of investor holdings in the ETF.
iShares Gold Trust (IAU) seeks to replicate the daily change in the price of gold bullion, minus expenses. The ETF holds physical gold in exchange for baskets of iShares purchased and held by investors in the fund.
Short of taking physical delivery of gold and then figuring out how to store it safely, Physical Gold ETFs offer the most direct way to invest in physical gold to take advantage of the price movement of gold bullion and hedge against macro financial risks.
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