A common way to invest in gold and
other precious metals without having to physically store it
yourself is through an ETF. ETF stands for exchange-traded fund. It
is like a mutual fund that is traded on a stock exchange like a
stock, and can be bought and sold very simply through any trading
platform, even a $6 Scottrade account. ETFs track a stock index
like the S&P 500, or an industry, or in this case a commodity,
specifically a precious metal like gold or silver. So you buy
shares in the fund, and the fund managers invest that money in gold
on your behalf. If the value of gold increases, the value of your
fund shares increases. When you cash out the fund sells your
portion of the gold and ives you your money. Theoretically
speaking, that is.
The problem with gold ETFs is that unlike possessing physical gold
bullion, you never really know what is happening with your gold.
You don't even know if you really have any gold. If you read the
fine print of the ETF prospectus you will find some fishy
statements, such as the iShares Silver Trust which states that
“The iShares are intended to constitute a simple and
cost-effective means of making an investment similar to an
investment in silver.” What do they mean by "an investment
similar to an investment in silver"? That statement clearly shows
that not all of your haress are backed by physical silver. They may
be backed by cash, they may be backed by a piece of paper that
promises to give the fund some silver in the future, but not every
share is backed by the physical bullion you intended to invest in.
Let's say the fund managers are playing with your
money in creative ways through futures
and whatnot, and make a big mistake and lose all of the fund's
assets? The value of your shares could drop like a rock even if the
value of gold is skyrocketing at that very moment. That possibility
is evident in another quote from the iShares Silver Trust
prospectus that says "the liquidity of the iShares may decline and
the price of the iShares may fluctuate independently of the price
of silver and may fall". There, they admit it. This investment is
not an investment in silver, at least not completely. I don't know
how likely those independent fluctuations are, but one of the major
reasons for holding physical gold is to protect your wealth in
times of chaos. But in times of chaos I wouln't be quite
uncomfortable holding shares in a trust that is owned by a bank. If
that bank decided to shut down the trust and default because they
don't have the physical metals to back your shares, what could you
do about it? It sounds unlikely, but in times of chaos who knows
what will happen. That's the point of having a safe haven
investment in physical precious metals.
To read more on some of the questionable conditions of your
investment in a gold or silver ETF read James Turk's articles
Unanswered
Questions About the Silver ETF
The
Paper Game
If you are an active short term trader, ETFs are a reasonable
trading vehicle. You can sell your shares easily any time you want,
through any trading platform including a discount online brokerage,
the buy/sell spread is much more narrow than when buying physical
precious metals. The funds basically do follow the movements of the
precious metals they are meant to track, so if you plan on making
short term trades ETFs are fairly secure. The problem comes through
exposing yourself to risk through longterm investment in an ETF. In
that case I highly recommend that you be the sole owner of your own
physical bullion and personally possess it, either in your home or
in a storage facility.
Gold Precious Metals ETF
at
10:59 AM
Labels: Investing in Gold
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