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What is the best method of investing in gold? Other than purchasing the metal

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rhett o rick Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Dec-06-09 02:32 PM
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What is the best method of investing in gold? Other than purchasing the metal
and burying it in the back yard.
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A HERETIC I AM Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-07-09 02:47 PM
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1. For ease of getting in and out of the position, it's hard to beat an ETF for this...
Edited on Mon Dec-07-09 03:40 PM by A HERETIC I AM
and you're probably aware there are several gold only and numerous precious metals ETF's available.

SPDR GLD is one.
iShares COMEX Gold is another.
Here's a list of Gold ETF's that includes some short positions as well.

There have been stories lately about whether or not a given ETF actually has the physical gold to back up their shares. Personally, unless ones aim is to try and force the ETF custodian to fork over the physical gold in exchange for their shares back, it doesn't make any difference whether they have the gold or not. As long as the shares easily trade, what difference could it possibly make?
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rhett o rick Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-07-09 06:13 PM
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2. I have a very limited knowledge of ETF's.
But if they have no gold to back the shares, it sounds to me like they are only a "bet" on whether the price will go up or down. I agree that as long as everyone is playing by the rules it wouldnt matter. But I guess I am suspicious. Are ETF's similar to derivatives?

Are there mutual funds that only buy gold metal?

Thanks for the help.
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A HERETIC I AM Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Dec-07-09 07:13 PM
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3. ETF = Exchange Traded Fund. Basically a basket of stocks, bonds or other securities..
packaged together with a particular goal in mind (income, growth of principal, income and growth etc. similar to Mutual Funds) and then shares are issued against the held securities and those shares trade on an exchange, just like a stock does. Each share represents a fractional ownership of the underlying basket, whether it be shares of every stock of an index (The Dow Jones 30 industrials or the entire S&P 500 for example) or several tons of gold bars.

If an issuer like iShares for example, wants to make sure their shares are reflecting the price of gold accurately - say at one tenth the price, then they are obligated to purchase more gold for each new share issued, otherwise the shares value will become diluted as more are issued. Here's the prospectus for the iShares Gold Trust (ticker IAU) and you'll note that in the 2nd paragraph of the first page, it says they intend to "issue iShares on a continuous basis". Typically however, ETF's issue a set number of shares at their initial offering and further shares placed into circulation or redeemed by the fund manager are done so only in large blocks and those transactions are limited to (usually) institutional investors (Pension funds, Annuity sub accounts, etc).

I mentioned that there have been stories about some gold ETF's not having all the gold they say they have. I have no way to know if this is true and unless the writers of such stories have actually been to their custodians vault and done a hands on audit, neither do they. It is important to bear in mind that while the share price of a gold ETF should roughly reflect the price of gold, the price of the shares will fluctuate based on the volume of them being traded and whether or not the bid/ask volumes favor the upside or downside as well as changes in the price of gold. In other words, it is possible that shares of a gold ETF could be bid down on a day that the spot price of gold rises.

Are ETF's similar to derivatives?
Similar only in that a share of an exchange traded fund is ownership of another thing or things. True "derivatives" would be options contracts, futures contracts, swaps (Credit default and otherwise) etc. When you buy a share of an ETF, you actually do own all of what the ETF represents, ie; shares of the S&P 500. If you own a call option for instance, you don't own the shares. What you own is the right but not the obligation to purchase the shares at the strike price for a specific length of time (till expiration). That's a derivative. For what it's worth, you can buy put and call options on IAU.


Are there mutual funds that only buy gold metal?
Yes. A quick screen using this screening tool from Morningstar.com reveals 73 Mutual Funds in the category "Equity Precious Metals" (the drop-down next to "Morningstar Category" scroll down and highlite "Equity Precious Metals". Leave all other choices at "All" ) If you are looking at possibly using a Mutual Fund, keep in mind that they are, by definition, designed to be held for extended periods of time. Watch for management and 12-b-1 fees and be mindful of the differences between share classes (A, B, or C shares)
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