How to Invest in Gold Using Stocks and ETFs

In a recent article, I said that you shouldn’t invest in gold ETFs but bullion instead. Here I’d like to qualify that statement. Gold stocks and ETFs aren’t always a bad idea. They can be a great investment, but only if you’re planning to hold them in the short term.

Gold ETFs are usually a bet against the market or – more specifically – the dollar. Of course, this is true of gold in general. If the dollar goes down then gold (usually) goes up and vice versa. ETFs are sometimes better than gold, though, because they’re easier to buy and sell.

This is because:
* High liquidity: Nowadays you can trade ETFs with a few clicks. That means you can be in and out of a position in a matter of days.

* Market price: There is no wholesale and retail price. Though there is often some spread, or a difference between the buying and selling price, this is generally small.

* Pure product: When you buy bullion you have to make sure it is actually pure. With ETFs that purity is built in.

* Less Granular: ETFs trade in quantities as small as milligrams, which is often too small an amount to buy physically. This means you can make smaller investments.

In other words, they’re great for getting in on a position when there will be a gold run and getting out when it has peaked.

How to buy Gold stocks and ETFs

Getting in on the Gold ETF game is easy. All you need is a demat account and an online trading account from which you can trade stocks. To get those you need a Permanent Account Number (PAN) card, proof of identity and a proof of address.

With those in hand, you can go ahead and buy ETF from your online broker’s trading portal. Your buy order will be matched with somebody else’s sell order and that’s it. You’re now the proud owner of an ETF.

What ETF to buy?

The first decision that you’ll want to make is if you want to own future or physical ETFs. The former is an obligation to buy or sell the product at some time in the future. The latter is linked to actual physical gold in the present.

No, it doesn’t sound like that big of a difference. It does matter, though, as prices can fluctuate differently for the two types. Then there are such things as ‘Contango’. This is where the future spot price is below the current price. If that happens, people are saying they are willing to pay more for a commodity at some point in the future than the expected price of it at that time.

If that all sounds confusing (and it is) then you’re probably better off trading in physical ETFs. These sidestep such issues. What’s more, they have generally performed better than futures anyway.

Big ETFs and their more volatile brethren

There are many different ETFs to choose from. The biggest one is the GLD, which is short for yet another acronym ‘SPDR gold shares’. The second biggest ETF is the IAU. It stands for the iShare Gold Trust.

These are good choices as they’re well-trusted and easily traded. Generally, people will buy these to hedge their bets, so that if in the future the economy tanks, big losses in stocks are offset by rises in these ETFs.

On the other end of the spectrum, you’ve got such ETFs as NUGT and JNUG. These are incredibly volatile. Prices can sometimes fluctuate by 20% in a matter of days. For example, in 2016 the price from the 27th of April till the 29th went from $88.21 to $119. By May fourth the price was back below $88 dollars. Then it went back up to $109 by May 6th and three days after that it was back at $87.

Yes, that’s some incredible volatility. This is not some mistake, but actually how they’ve been designed. Traders get in then get out while the getting is good. If you’re new to this type of trading, you’re best off avoiding these.

Don’t hold them long term

What to remember if you’re getting in on the gold game is how I started this article. ETFs are a good buy under specific circumstances. Buying gold long-term is not one of those. For example, they don’t pay dividends. Instead, you have to pay them!

Neither is it a good idea if you don’t expect a dip but an actual market crash as ETFs are still a market instrument. That means that if the market collapses, this instrument might well disappear along with it.

If you want to hedge long term against those risks, you should buy actual bullion instead.

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