introduction_to_gold_etfs.pdf

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INTRODUCTION TO

GOLD ETFS


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Gold ETFs:Easy Access To One Of Earths MostPrecious Metals

On April 28, the spot price o gold hit an all-time high,

reaching $1,535.00 an ounce mainly on the continued

slide o the U.S. dollar, and rom a run-up in ination.

Thats approximately double the price o $670 an ounce

the commodities market saw fve 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 astandard deviation o 0.7. Thats signifcantly 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 airly reliable investment. With demand still high

(gold purchases in India, or 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 signifcantly by 2020.

On Wall Street, like in most speculative venues, timing is

everything. Investors historically view gold as an excellenthedge against ination, and as a strong currency play

against a struggling dollar. With ination rising and the

dollar alling, gold-diggers are increasingly turning to

gold as a hedge and a proftable one, at that.

Turn To ETFs

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 eect, or the frst time ever,

buying commodities like gold is as user-riendly as buying

stocks. That has allowed an enormous inux o investorsinto 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 o gold

rom the und. According to the unds prospectus, each

share o the SPDR Gold ETF represents just one-tenth o an

ounce o gold. Other gold ETFs oer an even smaller slice

o the pie each share o the iShares Gold ETF (NYSE: IAU),or example, equals one-hundredth o an ounce o gold.

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.

Late April, 2011 marked a watershed moment for gold prices.


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Gold ETFsDefined

By and large, a gold exchange traded und (ETF) tracks

the current market price o gold. As noted beore, in most

ETFs, one ETF share represents one tenth o an ounce o

gold. With ETFs, shareholders dont

take physical possession o gold;

instead the gold is stored in a sae

location by the ETFs custodian.

Fees are inherent with gold ETFs, but

they are reasonable most unds

charge annual ees o around 0.5%(known as a und maintenance

ee).

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 o

28%.

Some variations apply. For an investor who buys into

a bullion-backed gold ETF and owns the investment orlonger than one year, any income earned rom the sale o

the und will be subject to the maximum tax rate o 28%.

But i the shareholder sells his or her und 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 o these sales

are passed on to them, the undsshareholders. With gold ETFs, such

gains and losses are taxable at 28%.

Structurally, gold ETFs are traded like

common stocks on the primary global

stock exchanges. Fund shares are

traded daily, during normal exchange

hours, and ETF prices can uctuate

signifcantly (commodities like gold

can be signifcantly volatile, especially when compared to

most common stocks).

What are gold ETFs?

Fast Fact:The World Gold Council estimates

the current market or gold ETFs to

be around $81 billion (http://www.

gold.org/investment/statistics/) ,

with demand or gold ETFs

skyrocketing at a rate o 414% or

the second quarter o 2011.


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Pros and Cons of Gold ETFs

For example, unless you buy gold directly rom a bank,

theres no guarantee o its purity on the open market. You

wont earn any interest rom owning physical gold, and

youll have to pay or a secure storage acility, such as a

bank vault to hold your gold.

Besides the simplicity actor, owning gold via an ETF oers

other benefts:

Increased liquidity: Gold ETFs oer some o bestliquidity on Wall Street. Besides being publicly traded every

day, gold ETFs are traded on the worlds major exchanges,

including New York, Sydney and Tokyo.

Smaller purchase amounts: Gold investors canleverage ETFs in a myriad o ways, and one o the most

popular is to buy gold in small amounts even as low as

hal o one gram, depending on the particular ETF.

Gold pricing is more transparent with ETFs:GoldETFs are sold on the open fnancial market, thus ensuring

that the price o 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

sell at market prices. Plus, with physical gold, sellers (such

as banks and jewelry store owners) oten add a premium

o up to 15% on gold sales.

No storage: With an ETF, investors dont have to worryabout storing gold. The gold is physically held by the und

provider, in a sae and secure location.

The purity issue: Exchange traded unds, likecommon stocks and mutual unds, are regulated by the

U.S. Securities and Exchange Commission. According to

regulatory statutes, ETFs must include assets with a purity

actor o 99.5% fneness and above. This guarantees that

investors will own a reliable, pure source o gold.

On the ip side, returns or gold ETFs can be muted when

compared to direct investment in physical gold. The latter

trades at higher prices, and thereore warrants higher

returns than gold ETFs.

In addition, to fght back as investors leave physical gold

to buy ETFs, gold dealers are cutting ees to store gold

making it more palatable or direct investors to buy gold

bullion and not 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 gowith commodity ownership.


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How To Play Gold ETFs

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 utures. The latter unds maynot track spot gold prices as closely as unds 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 o the gold market

youve ocused on. For gold bullion-based unds, investors

should target key market-moving issues like supplyand demand. I youre looking at mining and equipment

companies, add external actors to the mix (such as

rising energy costs, which tend to cut into profts o any

manuacturing company). Beyond that, researching gold

ETFs is similar to any individual stock just track the daily

chart o the ETF youre considering.

Not all gold ETFs are created equal, and their differences can definitely Impact

performance.

Comparisons Between

Physical Gold Gold ETFs

Pricing Highly volatileTransparent traded daily and

openly on global exchanges

Cost of Holding Paid or by owner Paid or by und

Quality Not guaranteed Must meet government standards

Liquidity Limited Strong

Safety Risk o thet No storage risk

ResaleNot guaranteed, and subject to

high volatilty

Easily sellable on open exchange

markets

Wealth Tax Yes Yes

Physical Gold and Gold ETFs


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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

perormance record is about 15.65%, and its fve-year

number is even better, at 19.21%. The unds mission is

a simple one track the spot price o gold bullion. With

$56 billion in assets, GLD is one o the largest commodity

unds in the world.

E-Tracs CMCI Gold Total Return ETN(Stock Quote: UBG)http://www.ibb.ubs.com/mc/etracs_US/CMCI_gold.

shtml

One o the smaller gold ETFs, UBG only has $7.2 million in

assets. Like DGL, it also tracks the price o gold utures, via

the UBS Bloomberg CMCI Gold Total Return. The CMCI Gold

TR measures the collateralized returns rom a basket o

gold utures contracts. According to the ETFs prospectus,

UBGs commodity utures contracts are diversifed acrossfve constant maturities, rom three months up to three

years.

Powershares DB Gold Fund (Stock Quote: DGL)http://www.dbunds.db.com/Dgl/Pds/DGL_Fact_

Sheet.pd

This und aims to mirror the perormance o the Deutsche

Bank Liquid Commodity Index-Optimum Yield Gold Excess

Return. DGL is primarily a utures play, and does represent

higher risk or investors. The und does not invest in gold

bars, but rather utures contracts on gold. That could meanhigher volatility, as the ETF may have returns that dont

necessarily match the price o spot gold. Fund perormance

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_ino/und/overview/

IAU.htm

IAU is a ast-moving und that picks up a great deal o

small money as investors build their gold portolios

incrementally by buying shares o IAU as gold pricesuxuate. The unds three-year average annual return is

stellar, at 20.86%. This ETF mirrors the spot price o gold.

Market Vectors Gold Mining ETF(Stock Quote: GDX)http://fnance.yahoo.com/q?s=GDX

Launched by Van Eck Global in 2006, GDX has accumulated

over $7 billion in assets in just fve years. In that time, the

unds average annual return o 10% has beaten most

standard equity returns. GDX tracks the price and yield

perormance o the AMEX Gold Miners index. This ETFinvests at least 80% o its total assets in common stocks

and American depositary receipts (ADRs) o 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 o breaking into the gold market. I the

dollar continues to decline, and ination keeps gathering

momentum, gold may not only be one o the most proftable

investments you can make, it may be one o the saestinvestments you can make.

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:


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Brian OConnell is a Doylestown, Pennsylvania-based

reelance writer with 15 years experience covering

business news and trends, particularly in the fnancial,

health care and career management sectors.

A ormer Wall Street bond trader, OConnells placed two

business books in The Book o the Month Club, and his

byline has appeared in dozens o top-tier national business

publications, including The Wall Street Journal, CNBC,

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