A Guide to Precious Metals ETFs

ETFs – exchange-traded funds – are hot-ticket items these days. So are precious metals, like gold and silver. When you combine the two, you get gold and silver ETFs – two of the most popular ETFs on the market today. Thanks to the unstable global economy, the value of precious metals has risen dramatically and could stay elevated for some time. That is why investors are flocking to get their hands on these metals in any way possible – including buying ETFs based on these commodities.

Here, I’ll cover precious metals ETFs: what they are, how they’re valued, and which ones are the best choices today.

Precious Metals: An Overview

A precious metal is a rare, naturally-occurring commodity that has a wide variety of uses ranging from currency to commercial and industrial use. Gold is probably the most well-known precious metal; it not only has been a store of value for thousands of years, but is also used heavily in jewelry, electronics, and other commercial and industrial purposes. Silver, while not as valuable as gold, is also a highly sought-after element. Other popular precious metals include platinum, palladium, and rhodium – a very rare metal in the platinum family that is used extensively in the automobile industry and is typically more valuable than any other rare metal.

Precious metal ETFs are exchange-traded funds that reflect the value of a commodity. They’re like mutual funds in that they represent the commodity’s value through a collection of stocks and other assets. They’re like stocks in that they can be bought and sold just like a stock on the open market. The goal is to give you a tradable asset that reflects the current value of the underlying commodity.

For example, a gold ETF goes up in value, roughly, whenever the price of gold goes up. (You can also get a short gold ETF, an ETF that goes up when the price of gold drops. More on that later.) The same goes for the other precious metals.

How Precious Metals ETFS are Valued

The specific way a PM ETF gets its value depends on the ETF. Some are based on indices that track the broad value of a commodity or group of commodities. Some are based on stocks of companies that mine and develop precious metals. Others are based on the spot price of the metal. The ETFS Physical Precious Metals Basket Trust (GLTR), for example, gets its value exclusively from the spot prices of gold, silver, platinum, and palladium, weighted depending on how much of each metal the trust owns. The ProShares Ultra Gold ETF (UGL) is an ETF that gives a return equal to twice the value of gold bullion (in U.S. dollars) for a single day.

By contrast, there are ETFs that are based on the companies that actually mine and process precious metals. These are more similar to stocks, so some investors prefer to invest in these because you can research a company’s financial data for more trading indications. The Market Vectors ETF Trust (GDX), for example, replicates the NYSE Arca Gold Miners Index (GDM), and holds assets in companies like Barrick Gold Corporation, Royal Gold Inc., Allied Nevada Gold Corp, and other companies that make their living off extracting and developing gold.

These ETFs – ones based on companies, not just the price of commodities – can be harder to evaluate because there’s a lot of financial data out there. On the other hand, though, these values usually less volatile because they aren’t subject to the sometimes-wild fluctuations of a commodity’s price (often caused by speculators).

What is the Best ETF for Gold?

We’ll now cover gold ETFs, since they are, by far, the most popular PM ETFs on the market oday.

The price of gold has taken off dramatically over the past decade, for a variety of reasons. At the beginning of 2000, gold was just over $300 per ounce; in mid-2011, it peaked at well above $1800 per ounce. There are several reasons, but one major reason is the relationship between gold and the U.S. dollar. Since gold is denominated, or expressed, in U.S. dollars, what affects the dollar impacts gold. What happened to the relative value of the dollar compared to other currencies from 2000 to the present day? It dropped – from a high of just over 120 on the United States Dollar Index (DXY) to its current value of around 82.

Economic uncertainty drives up the price of gold, as does any fall in the U.S. dollar. These are two key indicators to follow when planning your investment.

With that being said, there are two gold ETFs that are great for virtually any investor who wants to make money off the rise (or fall) of gold. The most direct way to get exposure to gold is to use an ETF that is based off the price of gold itself, rather underlying companies. The best gold ETF for this, in my opinion, is the SPDR Gold Trust (GLD), an ETF that tracks the price of gold bullion. It is a long investment, which means it’s designed for investors who believe gold prices will go up over time and want to hold onto the ETF to let it appreciate in value.

If you’re feeling extra adventurous, you can get leveraged gold ETFs that give you twice the return (or loss).

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