Financial Planning

It’s important to know what you’re getting into when you buy into a gold fund. You may have the idea that you’re always investing in gold with a gold ETF but that’s not always the case. Some funds are set up to profit if gold prices decline. There are three common sorts of ETF gold funds on the United States market.

Long term gold funds are for investors that believe that over the long run the price of gold is going to go up. The long gold fund buys gold and holds it so that when the price of gold rises the fund’s holdings are worth more. Some other types of long gold funds purchase companies that work in the gold industry or acquire contracts to buy gold. It the latter case they fund never really owns the gold, but the outcome for them is the sames as if they had purchased the gold itself.

If you invest in short ETF gold funds you are speculating that the price of gold is likely to drop. GLL and other short gold funds use a variety of strategies to be sure that should the price of gold fall, the fund will increase in value. In the current economic environment gold has seen quick rises. Many people think that markets will tend toward an average price. Under that theory gold will fall as they feel it is over-priced at present. If you were investing with a correction in the markets in mind, you would want to buy a short gold ETF.

Now, if you look into leveraged ETF funds you will find that they use contracts (options) or borrow funds to create a leveraged return on the price movements in the gold market. There are two fine examples of this in the double gold ETF fund and the inverse double short gold ETF. These sorts of funds can make or lose huge amounts of money in a hurry. Such funds follow the rise and fall of the gold price, but at double or triple the rate. These are low asset funds and can be very dependent on the competency level of the team taking care of the fund, particularly the fund manager. If you think there is going to be a management change soon, or one has just happened it is often safer to wait and see how things are going before you invest. You must also keep yourself aware of the current fee structure in those funds so that you know where you are applying your money.

To learn more about investing in an exchange traded fund, check out ETF News.