Gold ETF’s Shine In Inflationary Times

By Brian O’Connell

What to make of the current inflationary economic climate? To hear a government economist tell it, it’s basically “nothing to worry folks. Nothing to see here.”

That’s pretty much what Federal Reserve Chairman Ben Bernanke said in a press conference on April 27. Bernanke spoke of “keeping inflation low”, a theme that was widely greeted with praise from the financial media.

But some financial industry insiders knew better. Peter Schiff, CEO of Euro Pacific Capital, appeared on Yahoo Finance’s Breakout video blog the day after the Bernanke presser, summed it up aptly. “As the Fed chairman spoke, the dollar was getting crushed, gold surged to a new high,” said Schiff.  “How do you call that a success? That’s like saying the Titanic had a successful crossing just because some passengers happened to make it to New York.”

Yellow Fever

To beat inflation, and keep your investment portfolio pointed directly northward, advisors like Schiff are urging investors to put their cash into commodities – particularly gold.

“My investment strategy is based on the Fed continuously doing the wrong thing,” Schiff added. “What you have to do is avoid U.S.-dollar denominated investments. People need to own precious metals like gold and silver, they need to own commodities.”

Investors are getting that message. Right now, gold is trading at about $1,535.00 an ounce, and its broken records in nine of the last ten trading sessions. That’s approximately double the price of $670 an ounce the commodities market saw fives years ago (in May, 2006). That’s still far from the $2,300-per-ounce (adjusted for inflation). But gold prices aren’t all that out of whack. In the run-up to $1,500-an-ounce, gold prices over the past six months actually only have a standard deviation of 0.7. That’s significantly more stable than the 10.3 standard deviation the gold market saw in 1979, when gold prices rose 180%.

With demand still high (gold purchases in India, for example, have risen 25% in the past 10 years). The Word Gold Council expects that number to rise significantly by 2020.

Notes Juan Carlos Artigas, investment research manager at the World Gold Council, “Gold’s performance in Q1 2011 was characterized by continued concerns over the global economy, which have led investors to become increasingly aware of gold’s qualities as a preserver of wealth.

“Our intelligence indicates that purchasing confidence in key jewelry markets, notably India and China, increased during the period, as price volatility declined and the dollar weakened against local currencies, resulting in a more measured price increase,” he adds.

ETF Alert: How To Play the Gold Rush

So what’s your move into gold? By and large, you can either buy gold directly (storing it yourself) or get into the market via exchange-traded funds.

Buying physical gold directly is unwieldy, and not without its risks. Unless you buy gold directly from a bank, there’s no guarantee of its purity on the open market. You won’t earn any interest from owning physical gold, and you’ll have to pay for a secure storage facility, like a bank vault, to hold your gold.

That’s where gold exchange-traded funds enter the picture. Gold ETFs enable investors to invest in gold in funds where the gold is the underlying asset. Millions of investors are doing so across the globe, and at a burgeoning clip. One of the most popular gold ETF’s, SPDR Gold Shares (Stock Quote: GLD) averages more than 15 million in daily trading volume, and has about $54 billion in assets.

The World Gold Council estimates the current market for gold ETF’s to be around $81 billion, with demand for gold ETFs skyrocketing at a rate of 414% for the second quarter of 2011.

In a word, gold ETF’s are a lot like buying individual stocks – you buy gold that’s held by a fund that tracks the major gold indexes, and the fund trades on an exchange, just like stocks do.

Besides the simplicity factor, playing gold via an ETF offers benefits:

Increased liquidity: With ETF’s, gold is easier to sell – particularly on the major stock exchanges in New York, London and Sidney. You can’t always count on a buyer of physical gold, at least on a secure, relatively safe basis.

You can invest in any quantity – Gold ETFs allow investors to buy gold in small allotments  – even a half a gram of gold is buyable via an ETF.

Gold pricing is more transparent with ETFs – Gold ETFs are all about transparency – prices are reset every day, openly and transparently. With physical gold, sellers (like banks and jewelry store owners) often add a premium of up to 15% on gold sales.

No storage – you don’t have to worry about storing gold with an ETF. The gold is physically held by the fund provider, safely and securely.

Key Tips

Know going in that not all gold ETFs are alike. For example, certain gold ETFs (like GLD) will buy and hold gold bullion – and actually store the gold. Other ETFs invest primarily in gold futures. The latter funds may not track spot gold prices as closely as funds that physically hold gold bullion.

When you’re out there kicking tires on some of those gold ETF’s, focus on key performance impactors like supply and demand. Past that, researching gold ETFs is similar to any individual stock – just track the daily stock chart of the ETF you’re considering.

What specific gold ETFs should you consider? Surprisingly, there’s plenty to choose from a market that’s less than 10-years old. Try these funds for starters:

  • SPDR Gold ETF (Stock Quote: GLD)  
  • iShares Comex Gold Trust (Stock Quote: IAU) 
  • Market Vectors Gold Mining ETF (Stock Quote: GDX)
  • Powershares DB Gold Fund (Stock Quote: DGL) 
  • Proshares Ultra Gold (Stock Quote: UGL)

Gold ETFs are a simple and highly effective way of breaking into the gold market. If the dollar continues to decline, and inflation keeps gathering momentum, gold may be one of the safest bets you can make these days.