The Appeal of Gold ETFs

A small amount of gold in your portfolio can be used as a hedge for more traditional holdings.

By + More

Investing in gold has never been easier, thanks to the number of exchange-traded funds that now offer access to the metal. Meanwhile, fears that inflation is rising and the dollar is declining are leading some investors to seek out more tangible assets. Gold has topped $1,000 per ounce, and the jury is out on how much higher it could go.

[See Going for the Gold and A Precious Barometer.]

Some gold ETFs offer investors receipts for actual gold bullion that's stored in the fund company's vault. The funds have been on the market only for a few years. The first gold-backed ETF, SPDR Gold Shares (symbol GLD), launched in November 2004 and is currently the second-largest ETF on the market, with $34 billion in assets, according to Morningstar. A few months after the inception of SPDR Gold Shares, iShares launched its COMEX Gold Trust (IAU), which now has assets of about $2.4 billion. Both ETFs store their gold in London. The industry's newest addition, ETF Securities Physical Swiss Gold Shares (SGOL), which debuted in mid-September, stores its gold in Zurich.

[See ETFs: A Better Way to Invest.]

U.S. News spoke with Jim Wiandt, publisher of IndexUniverse.com, about gold ETFs and what they offer the average investor. By way of full disclosure, Wiandt is on the board of directors of ETF Securities as an independent director. Excerpts:

How have ETFs changed the way people can invest in commodities such as gold?

You really couldn't buy gold at any reasonable price up until now, so if you buy physical gold, you're paying a premium to get it, and if you buy some kind of a gold certificate where someone has gold in a vault somewhere, it's historically been extremely expensive. You could do it but, because of the storage cost and the lack of scale, that's been very expensive up until now. So gold really hasn't been that practical of an investment up until recently with the gold ETFs. . . . The SPDR product obviously met a huge demand when that came out. . . . There was a pent-up demand to get easy access to gold bullion, and that handled it.

Are there any major differences between the three ETFs that offer investors actual investments in gold?

The truth is, not really. They're very similar. They're priced identically. Although I think the ETF Securities ETF is one basis point cheaper. That's not a big difference. I think their big selling point is that the gold is in Switzerland as opposed to London. That's sort of aimed at the gold nuts, I think. . . . Their argument is that the government could just take your gold, and that would never happen in Switzerland. I think that's in the same crowd as the flat-Earth or the moon-landing-was-fake crowd.

Do you think this is a widely held belief?

It's on the fringes, but you can find people who are very serious about it out there. They know their market, and they definitely plan for that sort of fear. There are all sorts of conspiracy theories around gold—that it's controlled by central banks or the market is manipulated or any number of different conspiracy theories. I think the odds of any of them being true aren't great.

What do you make of gold's most recent run-up ?

I think gold has behaved very interestingly in recent years, particularly during the crises. You historically think of gold as a great hedge when markets are going down, when there's a lot of risk and fear in the market, but that's not always true. It certainly wasn't true when the Lehman collapse happened in the fall [and] the gold price actually went down significantly. It's just a part of the same process of deleveraging that hit everything else at that time. My sense is that gold has some interesting correlations benefit over time, but it's certainly no do-all, end-all.

What are the differences between investing in these gold ETFs compared with other options, like investing in shares of gold mining companies?

It's a very different investing experience, that's for sure. Holding physical gold resonates with a lot of people. The idea of actually owning the gold resonates on kind of an emotional level. That's one thing. The gold mining funds often hedge movements in the price of gold so they're not so as wildly affected by gold prices as you might think. At the same time, like equities in general, the gold mining stocks are more volatile generally than gold. Some people like that volatility, which can at times seem to accentuate the movement of gold, so if gold moves the mining companies are moving even more.

What do you think the upside is for owning gold right now? It's hard to predict, but a lot of people see it as a solid investment hedge against inflation.

A dollar-bearish environment is a gold-bullish environment. Fundamentally, that's it. If you believe that because the current administration is printing dollars in huge numbers, which they are, and spending money that we don't have, which they are, then that's going to drive an inflationary environment for gold specifically and commodities more generally, which are a good inflation hedge. Gold is at $1,000. How high is it going to go? There are people they say it's going to $3,000, $4,000, $5,000. . . . There are people who talked that way in the past, and gold went way, way, way down at a certain point, and it's come back up to a very high level, but it took a long time to get there. There were a lot of people who were sitting on gold at a low price for a long time. So it's hard to say what's going to happen. The current environment does look somewhat favorable to gold, but you have to be concerned when you're sitting at such a high level historically.

How should people use gold in their portfolios?

It depends on what you like. I wouldn't look at gold as a way to make earnings in the market. Gold to me is much more of a hedge against the potential of markets going down or a bad market environment. I think a lot of people sort of emotionally like gold. I wouldn't recommend putting huge percentages of your portfolio into gold . . . When you talk about commodities exposure in general you talk about levels of 5 percent or something like that, and I think gold fits into the category. . . . It's legit to own, and if you like it emotionally, then feel free to do that on the margin of your portfolio.

What about volatility? Where does gold rank?

People perceive gold to be to be extremely volatile in the same way people perceive currency fluctuations to be very volatile, but the reality is that the price movements are much, much less volatile than the price movements of stocks, for example. The stock market can drop 50 percent in a heartbeat. For gold to drop 50 percent—there's no way that happens overnight. So it's actually less volatile than equity markets. . . . Generally, the markets move up and down much more quickly, but gold can be stagnant for a long time. You just never know.