INTRODUCTION TO GOLD ETFS

Gold ETFs: Easy Access To One Of Earths Most Precious Metals

Late April, 2011 marked a watershed moment for gold prices.
On April 28, the spot price of gold hit an all-time high, reaching $1,535.00 an ounce mainly on the continued slide of the U.S. dollar, and from a run-up in inflation. Thats approximately double the price of $670 an ounce the commodities market saw five years ago (in May 2006). But gold prices arent really all that volatile, at least historically speaking. In the run-up to $1,500 an ounce, gold prices over the past six months actually only have a standard deviation of 0.7. Thats significantly more stable than the 10.3 standard deviation the gold market saw in 1979, when gold prices rose 180%. Consequently, more and more investors are starting to view gold as a fairly reliable investment. With demand still high (gold purchases in India, for example, have risen 25% in the past 10 years, and Chinas gold market is showing similar growth), the World Gold Council expects that number to rise significantly by 2020. On Wall Street, like in most speculative venues, timing is everything. Investors historically view gold as an excellent hedge against inflation, and as a strong currency play against a struggling dollar. With inflation rising and the dollar falling, gold-diggers are increasingly turning to gold as a hedge and a profitable one, at that.

Turn To ETFs
But how those investors are buying gold is becoming increasingly different. More and more, investors arent buying physical pieces of gold which become difficult to manage when gold sells for over $1,500 per ounce.
Instead, theyre turning to gold ETFs, which allow investors to gain access to the big run-up in gold, but at a much more reasonable price. In effect, for the first time ever, buying commodities like gold is as user-friendly as buying stocks. That has allowed an enormous influx of investors into the gold market. Currently, total assets in the largest gold ETF on the market the SPDR Gold Shares (NYSE: GLD) is close to $56 billion. Each GLD shareholder only receives a small piece of gold from the fund. According to the funds prospectus, each share of the SPDR Gold ETF represents just one-tenth of an ounce of gold. Other gold ETFs offer an even smaller slice of the pie each share of the iShares Gold ETF (NYSE: IAU), for example, equals one-hundredth of an ounce of gold.

Gold ETFs Defined

What are gold ETFs?
By and large, a gold exchange traded fund (ETF) tracks the current market price of gold. As noted before, in most ETFs, one ETF share represents one tenth of an ounce of gold. With ETFs, shareholders dont take physical possession of gold; instead the gold is stored in a safe location by the ETFs custodian. Fees are inherent with gold ETFs, but they are reasonable most funds charge annual fees of around 0.5% (known as a fund maintenance fee). Tax-wise, gold ETFs are a mixed bag. Most bullion-backed ETFs are taxed the same as physical gold currently at a maximum tax rate of 28%. the fund will be subject to the maximum tax rate of 28%. But if the shareholder sells his or her fund assets within one year, the investment is subject to ordinary income rates. In addition, even a simple buy and hold play can incur a tax hit. Many commodity ETFs sell gold to pay operational expenses. But what investors may not realize is that the gains and losses of these sales are passed on to them, the funds shareholders. With gold ETFs, such gains and losses are taxable at 28%.

Fast Fact:

The World Gold Council estimates the current market for gold ETFs to be around $81 billion (http://www. gold.org/investment/statistics/), with demand for gold ETFs skyrocketing at a rate of 414% for

Structurally, gold ETFs are traded like common stocks on the primary global stock exchanges. Fund shares are the second quarter of 2011. traded daily, during normal exchange hours, and ETF prices can fluctuate significantly (commodities like gold can be significantly volatile, especially when compared to Some variations apply. For an investor who buys into most common stocks). a bullion-backed gold ETF and owns the investment for longer than one year, any income earned from the sale of

Pros and Cons of Gold ETFs

The primary benefit of buying gold ETFs over direct purchases of gold is simplicity. Physical ownership of gold brings with it some serious responsibilities that go with commodity ownership.
For example, unless you buy gold directly from a bank, theres no guarantee of its purity on the open market. You wont earn any interest from owning physical gold, and youll have to pay for a secure storage facility, such as a bank vault to hold your gold. Besides the simplicity factor, owning gold via an ETF offers other benefits: ETFs offer some of best liquidity on Wall Street. Besides being publicly traded every day, gold ETFs are traded on the worlds major exchanges, including New York, Sydney and Tokyo. sell at market prices. Plus, with physical gold, sellers (such as banks and jewelry store owners) often add a premium of up to 15% on gold sales.

No storage: With an ETF, investors dont have to worry

about storing gold. The gold is physically held by the fund provider, in a safe and secure location.

Increased liquidity: Gold

Smaller purchase amounts: Gold investors can leverage ETFs in a myriad of ways, and one of the most popular is to buy gold in small amounts even as low as half of one gram, depending on the particular ETF. Gold pricing is more transparent with ETFs: Gold
ETFs are sold on the open financial market, thus ensuring that the price of the securities are always quoted on the stock exchange and that there is always a bid/ask price available during market hours, enabling investors to buy or

The purity issue: Exchange traded funds, like common stocks and mutual funds, are regulated by the U.S. Securities and Exchange Commission. According to regulatory statutes, ETFs must include assets with a purity factor of 99.5% fineness and above. This guarantees that investors will own a reliable, pure source of gold.
On the flip side, returns for gold ETFs can be muted when compared to direct investment in physical gold. The latter trades at higher prices, and therefore warrants higher returns than gold ETFs. In addition, to fight back as investors leave physical gold to buy ETFs, gold dealers are cutting fees to store gold making it more palatable for direct investors to buy gold bullion and not gold ETFs.

Physical Gold and Gold ETFs

Physical Gold Pricing Cost of Holding Quality Liquidity Safety Resale Wealth Tax
Highly volatile Paid for by owner Not guaranteed Limited Risk of theft Not guaranteed, and subject to high volatilty Yes

Comparisons Between

Gold ETFs
Transparent traded daily and openly on global exchanges Paid for by fund Must meet government standards Strong No storage risk Easily sellable on open exchange markets Yes

How To Play Gold ETFs

Not all gold ETFs are created equal, and their differences can definitely Impact performance.
For example, select gold ETFs (like GLD) may buy and hold gold bullion, physically securing and storing the gold. Other ETFs invest primarily in gold futures. The latter funds may not track spot gold prices as closely as funds that physically hold gold bullion. Still other gold ETFs invest not on gold, but in gold mining and equipment companies. Your research will depend on the corner of the gold market youve focused on. For gold bullion-based funds, investors should target key market-moving issues like supply and demand. If youre looking at mining and equipment companies, add external factors to the mix (such as rising energy costs, which tend to cut into profits of any manufacturing company). Beyond that, researching gold ETFs is similar to any individual stock just track the daily chart of the ETF youre considering.

How To Play Gold ETFs (cont.)

Which specific gold ETFs should you consider? For a market less than 10 years old, there is a surprising number to choose from. Try these for starters:
SPDR Gold ETF (Stock Quote: GLD)
http://www.spdrgoldshares.com/ GLD has been around since 2004, and has a solid long-term track record. Its three-year average annual performance record is about 15.65%, and its five-year number is even better, at 19.21%. The funds mission is a simple one track the spot price of gold bullion. With $56 billion in assets, GLD is one of the largest commodity funds in the world. has been strong the ETFs average annual return over the past three years is 19.18%.

iShares Comex Gold Trust (Stock Quote: IAU)

http://us.ishares.com/product_info/fund/overview/ IAU.htm IAU is a fast-moving fund that picks up a great deal of small money as investors build their gold portfolios incrementally by buying shares of IAU as gold prices fluxuate. The funds three-year average annual return is stellar, at 20.86%. This ETF mirrors the spot price of gold.

E-Tracs CMCI Gold Total Return ETN (Stock Quote: UBG)

http://www.ibb.ubs.com/mc/etracs_US/CMCI_gold. shtml One of the smaller gold ETFs, UBG only has $7.2 million in assets. Like DGL, it also tracks the price of gold futures, via the UBS Bloomberg CMCI Gold Total Return. The CMCI Gold TR measures the collateralized returns from a basket of gold futures contracts. According to the ETFs prospectus, UBGs commodity futures contracts are diversified across five constant maturities, from three months up to three years.

Market Vectors Gold Mining ETF (Stock Quote: GDX)

http://finance.yahoo.com/q?s=GDX Launched by Van Eck Global in 2006, GDX has accumulated over $7 billion in assets in just five years. In that time, the funds average annual return of 10% has beaten most standard equity returns. GDX tracks the price and yield performance of the AMEX Gold Miners index. This ETF invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of gold mining industry companies. Call them the great equalizer. Gold ETFs give regular investors a chance to rub elbows and gold coins with the commodity investing elite. That alone makes gold ETFs a great way of breaking into the gold market. If the dollar continues to decline, and inflation keeps gathering momentum, gold may not only be one of the most profitable investments you can make, it may be one of the safest investments you can make.

Powershares DB Gold Fund (Stock Quote: DGL)

http://www.dbfunds.db.com/Dgl/Pdfs/DGL_Fact_ Sheet.pdf This fund aims to mirror the performance of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold Excess Return. DGL is primarily a futures play, and does represent higher risk for investors. The fund does not invest in gold bars, but rather futures contracts on gold. That could mean higher volatility, as the ETF may have returns that dont necessarily match the price of spot gold. Fund performance

about the author

Brian OConnell is a Doylestown, Pennsylvania-based freelance writer with 15 years experience covering business news and trends, particularly in the financial, health care and career management sectors. A former Wall Street bond trader, OConnells placed two business books in The Book of the Month Club, and his byline has appeared in dozens of top-tier national business publications, including The Wall Street Journal, CNBC, The Street.com, Yahoo Finance, CBS Marketwatch, and many more. He is also the author of the top-selling books CNBCS Guide To Creating Wealth and Generation E. The author of 14 books, OConnell has also appeared as an expert commentator on business issues for CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio, The LA Times, and other media outlets.

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