Have you heard about gold ETFs (exchange-traded fund) but aren’t sure if you should invest in them or actual gold?
Gold has long been considered a safe investment. In fact, gold was such a hedge against other risks that governments used it to back currencies.
Today, this precious metal is one of the cornerstones of a sensible investment strategy.
New ways of investing in gold have been emerging. One of the most popular is the gold ETFs. These funds allow investors to invest in gold, often at a low cost.
Like other investments, most gold ETFs come with risks. Should you invest in precious metals, or is an ETF a better choice? Many investors are wondering which is the smarter move.
What is an ETF?
An ETF or exchange-traded fund is a financial instrument or product that attempts to track the price of a commodity, index, or another financial instrument. They are traded on a stock exchange.
The Ins and Outs of Gold ETFs
Gold ETFs are relatively new to the investment scene, but they’ve become very popular. Most investors see them as a good way to buy into the precious metals market without spending too much.
What is a gold ETF? Like other exchange-traded funds gold ETFs allow investors to buy shares in the fund. And these funds then buy the gold.
People like gold ETF trading because it’s convenient. There’s no need to store physical precious metals. This also reduces the chances of theft.
Finally, people like gold ETF price points. Investing in physical gold can be expensive so ETFs can offer an alternative.
The Risks of Gold ETFs The trade-off for investing in most gold ETFs is increased risk. The risks of Gold ETFs can be broken down into two: Product risk and counterparty risk.
There are hundreds of gold ETFs available. Some with that are leveraged, some which only trade in physical, some which only trade in gold futures and some which only buy gold mining companies. In turn, they are sold by a multitude of fund managers, in different jurisdictions, with vary degrees of protections. But they all have one thing in common, the client buying is not buying actual gold. Rather, in the case of physical gold ETF, they are buying shares in a fund which then buys gold.
And most investors don’t hold enough shares to request physical gold.
Instead, most ETFs are currently set up to settle in cash. Even if an investor owns enough shares to buy gold, many funds reserve the right to pay cash instead.
So, what are you really buying? In essence, and in a hyperinflationary example, by the time your money is returned the value of that money has already decreased. Surely the whole point of buying gold is to actually own it, rather than merely having exposure to it.
The second issue is counterparty risk. In the vast interconnected and interdependent web that is the modern financial system, any financial crises can bring down financial institutions very quickly. What if the issuer of the ETF is no longer solvent? What if the counterparty of the issuer who provides financing is no longer solvent?
These are not hypothetical questions. During the 2008 financial crisis many ETFs were not able to be traded for weeks because a distant counterparty had become bankrupt and its assets were frozen. Investors who thought they were buying gold were in fact buying just exposure to Gold plus an unknown counterparty risk that they were not aware of. Without financial crises the system works, however, as we’ve seen time and time again, when it doesn’t work, the complex chain of interdependence collapses leaving investors, once again, unable to access their money.
Goldex as the Alternative
Buying gold via an ETF to hedge against a financial crisis makes little sense when the ETF is dependent on the said financial system for its existence. This especially true of ETFs that do not even own the Gold they track and instead are using futures contracts.
Though it sounds strange many gold investors don’t own gold. They own exposure to gold. And with that exposure comes a litany of counterparty risk and product risk that in times of crises, for which reason they have invested, can not be truly relied on. If you want to own gold, then own it. And Goldex can help you own it.