Thursday, August 11, 2011

ETF Entrance Into Gold Rush Proves Rewarding But Volatile

There are a lot of reasons to invest in gold, but to ride the extraordinary, multi-year rally underway you don't need to go out and buy some coins or bullion and put it in your bank's safe deposit box.

Gold's [XAU= 1755.89 12.49 (+0.72%) ] low correlation with other asset classes, like stocks and bonds and even other commodities, for example, can help minimize volatility in an otherwise equity-heavy portfolio.

“We are still arguing that people should add gold to their portfolios as part of a diversification strategy,” says Katherine Klingensmith, a strategist for UBS Wealth Management Research. “There’s still quite a bit of concern about the structural integrity of the financial markets, so there are still plenty of folks looking for hedges against continued weakness in the global growth story.”


Truth is, gold coins or bullion are generally unaffordable to all but the most affluent investors, leaving interested average investorsmutual funds and exchange traded funds[cnbc explains] .

And there’s no shortage from which to choose. Some 22 mutual funds and 21 ETFs focus all or most of their investment holdings on gold.

But their investment strategies differ greatly. As such, they haven’t all been buoyed by the modern day gold rush.

Mutual Funds

Most gold mutual funds, for example, are equity-based, investing primarily in companies engaged in the mining, production, processing and distribution of gold.

Thus, they track a stock index like the Dow Jones Platinum & Precious Metals Index [.DJUSPT 96.84 8.13 (+9.16%) ], not the price of gold.

Due to increased labor and energy costs, however, such funds have generally fared worse in recent years than their counterparts that invest directly in gold bullion – the commodity itself.

To wit, the FTSE Gold Mines Index, which tracks the performance of all major gold mining companies worldwide, is down more than 6 percent for the first seven months of the year, despite the runup in spot gold prices.

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