Gold ETF Investments As The Lesser Of Two Evils?

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To establish a framework, the broad term “gold fund” is rather general in nature, and I see it as covering a variety of precious metals investments, including financial instruments that are intended to do little more than keep lock-step with the price fluctuations of the underlying metal itself.

Beyond that, in the over-arching category of gold funds I include also the gold-based mutual funds that focus on gold mining companies. In addition, gold funds also include the sub-category of investments called exchange traded funds (ETFs) that function like a single stock, but involved multiple mining companies just like a mutual fund. And, since some people dislike mutual funds for a number of reasons, I’d like to look at instead using a gold ETF as an option.

A gold ETF does provide a number of features that beat a mutual fund. For one, because it behaves like a stock, you can actually buy and sell all day long, rather than waiting until the end of the day for the net asset value to be determined. In addition, there are real-time quotes offered, just like stocks, allowing you to use limit orders as I typically do. Third, there are put and call options available on the gold ETF, just like with stocks.

Perhaps one of my favorite gold ETF products is the Market Vectors Gold Miners ETF or GDX for short. This is a nice choice for avoiding the mutual fund limitations just noticed and gives you plenty of flexibility. If you like the idea of gold ETF investing, and yet want to participate in smaller junior resource companies, then the sister fund is the GDXJ (Market Vectors Junior Gold Miners ETF).

Now, having shared with you some advantages over corresponding mutual funds, I want to now confess why I personally do not invest in gold ETF products like GDX, except only to conduct short-term trades to amplify price moves by way of call options. See, keep in mind that, despite any bones you might pick with a mutual fund, at least those are actively traded, while the GDX is anchored to the NYSE Arca Gold Miners Index. The Index is simply a set selection of mining producers around the world. This is okay, as rising metal prices only add quickly to the internal rate of return and make these companies remarkably profitable.

But, bear in mind that with GDX you are essentially stuck with those Index companies, whether you want to be or not. Overall, this may not be a problem. Yet, there are things that happen, and there could be reason to dump one company and grab a replacement at will. A decently-educated investor can pick and choose to create his own buffet of stocks that can easily outperform GDX.

At the same time, I don’t want you to think that I’ve tossed GDX out the window altogether. Keep in mind that I will not ever buy and hold GDX, or a similar gold ETF, for the long haul, since I can blow away those returns on my own, but I do like to periodically use call options to suck mind-numbing fast returns from the market that are amplified versions of the underlying price hikes of the stocks that form the foundation of the ETF. For instance, in August of 2010 I bought the $50 December 2010 call option on GDX and sold just 6 weeks later for a return over 100%. So, I’m not in it for the duration, but a short play like that never hurt anybody!

At the end of the day, if you were interested in the mining companies but didn’t want the limitations of gold ETF products, you could check out USERX (U.S. Global Investors Gold and Precious Metals Fund). And if you have an eye towards junior mining companies, you might all the more want to consider the active management of the mutual fund route. The companion product to USERX is UNWPX for the smaller companies, as these are both managed by Frank Holmes.

Any way you slice it, you are stuck choosing between the appeal of active management with the mutual funds and the ease of stock-like trading with the ETFs. As for me, I just skip the tough decision and avoid them both. I’ve simply found nothing better than picking quality companies and earning returns that beat each of them.

Source by J. Scott Talbert

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