How Gold and Silver ETFs Work | Savings Habit

How Gold and Silver ETFs Work??

Article by Steven Hart

An exchanged traded fund or ETF is actually a publicly traded investment company that sells shares. Unlike a mutual fund the shares are traded directly on a stock exchange like stocks. A gold or silver ETF is a fund which has a strategy focused on investment in the gold or silver markets.

How an ETF WorksAn ETF is a company with a difference instead of providing a good or service it invests funds on behalf of its shareholders. The fund?s management team uses the money raised by selling shares to make investments. The shareholders profit from this in the form of dividends and increased share value.

Most ETFs follow a particular strategy a gold or silver exchange traded fund is designed to profit from the gold and silver markets. There are three different methods funds use for this. Each of these funds uses a variation on one of these strategies.

Direct InvestmentThe first and most basic strategy is direct investment. A found like the State Street Gold Spider or Gold Shares buys physical gold in the form of gold bars or bullion. The bars are kept in the HSBC Bank in London. The advantage to this arrangement is that it allows average people to participate in the gold commodities market without owning the metal.

The disadvantage is that the value of this kind of ETF is that its value is based purely on the price of gold on the commodities exchanges. That means the funds value is determined directly by what the price of a troy ounce of gold or silver is trading for in New York, London and Chicago. If it goes up the price goes up, if it goes down the price goes down.

Despite what some people think precious metals can lose value just like stocks can. Gold lost nearly half its value in the 1980s. Gold can also lose 2% or more of its value in a day of trading. Silver fell in value by over an ounce in November 2011. Therefore a gold or silver ETF can actually be more volatile than an indexed stock ETF.

Gold and Silver Index ETFAn indexed exchange traded fund invests in stocks of companies on a list or index. A gold or silver index ETF invests in stocks in companies that it?s managers believe are in a position to profit from the gold or silver market.

This could include gold or silver mining companies, or companies that operate in regions that could profit from such mining. A typical ETF might invest in the five or ten largest mining companies in the world. Such an indexed ETF is actually a stock index. It can be less vulnerable to the market than a direct investment ETF.

Hedging Gold and SilverAnother kind of precious metals exchange traded fund literally bets that the price of a metal is about to fall or rise. This is called hedging, and it is a risky strategy that can pay off if the speculator gets lucky.

A gold bear ETF bets that gold prices are about to fall so it sells gold. A silver bull ETF buys silver in hopes that the prices will rise. These ETFs actually profit by buying and selling or speculating.

The disadvantage to these vehicles is that they can lose money if their managers bet wrong. If the price fails to go up a bull product can lose money. If it goes up a bear ETF can make some money but it will lose it buying the gold back at a higher price.

Are Gold and Silver ETFs a Good Investment?A direct-investment or gold and silver index exchange traded fund can be a good investment. Such funds are an excellent means of diversifying a portfolio against risks. Gold can be a good protection against inflation because it retains or gains value under most circumstances. Gold mining companies often do well during bull markets. Silver is more volatile and cannot be relied upon to protect against inflation. Hedged ETFs are a poor investment because they are based on speculation.

A person should only put a percentage of his or her investment funds in such vehicles because they are more volatile than some people think. Owning a few shares of a gold or silver ETF might be a good idea. Investing all of your money in it would be stupid and risky.

About the Author

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.

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