Should You Invest in Gold Exchange-traded Funds? Posted by James Randolph on February 13, 2010
February 13, 2010 – As a great deal of discussion in the precious metal markets has centered on gold exchange-traded funds and whether they are something that the average investor should consider. According to the World Gold Council, SPDR Trust, the largest ETF, now holds over 1,100 tons of gold, more than the countries of China and Japan. While these funds swell in size, they may not represent the best option for many investors.
The focus of ETFs has wandered; some institutional buyers use them to hedge other positions, financial advisers can use them to create quick, custom investment portfolios for clients and some individuals can use them for a 2010 version of day trading. "We’re now into the bastardization of ETFs…" says Mitch Tuchman, CEO of MarketRiders.com.
Gold exchange-traded funds have several serious problems, making them dangerous for the average trader, including over-trading, leveraged funds and specialty funds. Over-trading occurs frequently because inexperienced have unlimited access to make trades. Leveraged funds are dangerous; while they offer big gains, they can create big losses when the market goes against them. Specialty funds are also very risky since they focus on low volume commodities or trade techniques that can go wrong quickly. As Burt Greenwald, a Philadelphia-based mutual fund consultant points out about these funds, "They’re slicing the baloney thinner and thinner."
While gold exchange-traded funds promise great potential, the best bet for most investors is to trade physical gold. Buying and selling bullion or certified gold coins offers a tangible asset that retains value and is instantly liquid. As Eric Janszen, the founder of itulip.com states, "If you’re going to own gold, the nature of the risk you are hedging is such that owning stocks in mining companies and ETFs don’t cut it, you need to own the physical stuff.” For most people, buying physical gold is the best way to go.
Senior Staff Writer – Certified Gold Exchange