Gold Exchange Traded Funds have become a significant factor in the world gold markets.
Exchange Traded Funds buy and hold a set amount of gold, then sell shares in their gold inventory. These shares are bought and sold on the secondary markets by brokers just like shares of stock.
The market share price remains closely tied to the market gold price of the underlying amount of gold represented by each share. One share represents one-tenth of an ounce of gold.
Therefore, buying shares in gold Exchange Traded Funds is an easy way for both institutions and ordinary people to invest in gold. You don’t have to worry about taking possession of, or storing, the physical coins or bars. Buying shares of gold mining stocks represents additional risk, whether the company is well managed and has gold in the mines it owns. You also don’t have the many risks, expenses and hassles of buying gold commodity contracts or options, which are time-limited investments anyway, suitable only for speculators, not ordinary people who simply want to own some gold to hedge their portfolios.
Buying gold ETF shares is a direct way of benefiting from increases in the price of gold, without contact with the actual metal (which is held in storage by the ETF company). The ETF company can issue new shares only by purchasing additional gold and adding that to its inventory.
The first such fund was LyxOR Gold Bullion Securities (GBS) in Australia in March 2003. In October 2004 StreetTRACKS launched Gold Shares (GLD). Barclays ishares COMEX Gold Trust launched in 2005. Many other gold ETFs have been created in financial markets around the world.
Partly as a result of the rapid rise in the price of gold, GLD became one of the fastest growing Exchange Traded Funds.
Holdings by gold ETFs now exceed central bank reserves of the European Central Bank, The Netherlands, China, Russia, the United Kingdom and many other countries. As of a few years ago, ETF gold holdings amounted to 780 tonnes. Cumulatively, central banks hold a lot more, and there’s a lot more gold in jewelry.
Now the daily gold market is extremely liquid. Ordinary investors, institutions, and hedge funds all use gold ETFs. If Morgan Stanley is correct, the total assets of global ETFs will reach $2 trillion by 2011.
There’s no doubt that many small investors are using gold ETFs as a convenient way to invest in gold. Some many understand it’s a way of hedging against future financial crises, a collapse in value of the US dollar (and euro, yen, British Pound, and all fiat currencies), or other economic problems.
Some buyers are no doubt convinced by gold bug pundits and doom and gloomers that the end of the current world financial crisis is near and gold is their savior.
However, in a total economic collapse ETF shares will not be worth anything, so hardcore survivalists must remain more attracted to physical possession of gold bars and gold coins.