GOLD- PHYSICAL, VS. ETF ASINVESTMENT OPPORTUNITIES

NIKITA GOYAL

DPGD/JL12/0114

WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT AND RESEARCH

YEAR OF SUBMISSION:- APRIL, 2014.

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ACKNOWLEDGEMENT

With Immense pleasure I would like to present this report on “GOLD-PHYSICAL, VS. ETF AS INVESTMENT OPPORTUNITIES”

I would like to thank Welingkar Institute of Management for providing me the opportunity to present this project.

My special thanks to Mrs. Jennifer Worringer (Project Guide) for her invaluable guidance, co-operation and for taking time out her busy schedule to help me.

Acknowledgements are due to my parents, family members, friends and all those people who have helped me directly or indirectly in the successful completion of the project.

NIKITA GOYAL

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CERTIFICATE FROM THE GUIDE

This is to certify that the Project work titled GOLD-PHYSICAL,

VS. ETF AS INVESTMENT OPPORTINITIES is a bonafide work

carried out by Nikita Goyal (Roll No. DPGD/JL12/0114) a

candidate for the Post Graduate Diploma examination of the

Welingkar Institute of Management under my guidance and

direction.

SIGNATURE OF GUIDE

NAME : Mrs. Jennifer Worringer

DESIGNATION : Asst Librarian

ADDRESS : Mercer Country Library,

138 Hickory Corner Road,

East Windsor, NJ

DATE :

PLACE :

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TABLE OF CONTENTS

TITLE PAGE…………………………………………………….…1 ACKNOWLEDGEMENT………………………………………….2 CERTIFICATE FROM THE GUIDE……………………………...3 TABLE OF CONTENT…………………………………………….4

A. INTRODUCTION

INTRODUCTION OF INVESTMENT………………………5 TYPES OF INVESTMENT…………………………………..7 FACTOR TO CONCIDER BEFORE INVESTING………..9 INTRODUCTION TO GOLD………………………………...11 TYPES OF GOLD INVESTMENT………………………….13 ADVANTAGES OF OWNING GOLD………………………16 DISADVANTAGE OF OWNING GOLD……………………17 INTRODUCTION OF EXCHANGE TRADED FUND……..20 COMPARISON OF PHYSICAL GOLD VS GOLD ETF…..30

B. BACKGROUND

Brief Introduction……….………………………………….. 31 Case Study……………………………………………………32

C. METHODOLOGY

Review of Literature………………………………………………33 Situation A & Discussion & Findings………………………….34 Situation B & Discussion & Findings………………………….39

D. CONCLUSIONS………………………………………………………63

E. RECOMMENDATIONS………………………………………………64

F. LIMITATIONS……………………………………………………….....65

G. BIBLIOGRAPHY……………………………………………………...66

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INTRODUCTION OF INVESTMENT

Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income, or appreciation of the value of the instrument. Investment is related to saving or deferring consumption.

Meaning of Investment:

An investment involves the choice by an individual or an organization such as a pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time.

When an asset is bought or a given amount of money is invested in the bank, there is anticipation that some return will be received from the investment in the future.

Definition of Investment from different Perspectives:

Investment is a term frequently used in the fields of economics, business management and finance. It can mean savings alone, or savings made through delayed consumption. Investment can be divided into different types according to various theories and principles.

While dealing with the various options of investment, the defining terms of investment need to be kept in mind.

Investment in terms of Economics:

According to economic theories, investment is defined as the per-unit production of goods, which have not been consumed, but will however, be used for the purpose of future production.

Examples of this type of investment are tangible goods like construction of a factory or bridge and intangible goods like 6 months of on-the-job training.

In terms of national production and income, Gross Domestic Product (GDP) has an essential constituent, known as gross investment.

Investment in terms of Business Management:

According to business management theories, investment refers to tangible assets like machinery and equipments and buildings and intangible assets like copyrights or patents and

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goodwill. The decision for investment is also known as capital budgeting decision, which is regarded as one of the key decisions.

Investment in terms of Finance:

In finance, investment refers to the purchasing of securities or other financial assets from the capital market. It also means buying money market or real properties with high market liquidity. Some examples are gold, silver, real properties, and precious items.

Financial investments are in stocks, bonds, and other types of security investments. Indirect financial investments can also be done with the help of mediators or third parties, such as pension funds, mutual funds, commercial banks, and insurance companies.

Investment in terms of Personal Finance:

According to personal finance theories, an investment is the implementation of money for buying shares, mutual funds or assets with capital risk.

Investment in terms of Real Estate:

According to real estate theories, investment is referred to as money utilized for buying property for the purpose of ownership or leasing. This also involves capital risk.

COMMERCIAL REAL ESTATE: Commercial real estate involves a real estate investment in properties for commercial purposes such as renting.

RESIDENTIAL REAL ESTATE: This is the most basic type of real estate investment, which involves buying houses as real estate properties.

 Investopedia explains 'Investment'

The building of a factory used to produce goods and the investment one makes by going to college or university are both examples of investments in the economic sense.

In the financial sense investments include the purchase of bonds, stocks or real estate property.

Be sure not to get 'making an investment' and 'speculating' confused. Investing usually involves the creation of wealth whereas speculating is often a zero-sum game; wealth is not created. Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing.

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TYPES OF INVESTMENT

Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit. Investments can be broken into three basic groups: ownership, lending and cash equivalents.

Ownership Investments

Ownership investments are what comes to mind for most people when the word "investment" is

batted around. Ownership investments are the most volatile and profitable class of investment.

The following are examples of ownership investments:

Stocks

Stocks are literally certificates that say you own a portion of a company. More broadly speaking,

all traded securities, from futures to currency swaps, are ownership investments, even though

all you may own is a contract. When you buy one of these investments, you have a right to a

portion of a company's value or a right to carry out a certain action (as in a futures contract).

rights to.

Your expectation of profit is realized (or not) by how the market values the asset you own the

rights to.

If you own shares in Sony and Sony posts a record profit, other investors are going to want Sony shares too. Their demand for shares drives up the price, increasing your profit if you choose to sell the shares.

Business

The money put into starting and running a business is an investment. Entrepreneurship is one of

the hardest investments to make because it requires more than just money. Consequently, it is

also an ownership investment with extremely large potential returns. By creating a product or

service and selling it to people who want it, entrepreneurs can make huge personal fortunes.

Bill Gates, founder of Microsoft and one of the world's richest men, is a prime example.

Real Estate

Houses, apartments or other dwellings that you buy to rent out or repair and resell are

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investments. The house you live in, however, is a different matter because it is filling a basic need. The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn't be purchased with an expectation of profit. The mortgage meltdown of 2008 and the underwater mortgages it produced are a good illustration of the dangers in considering your primary residence an investment.

Precious Objects

Gold, Da Vinci paintings and a signed LeBron James jersey can all be considered an ownership

investment - provided that these are objects that are bought with the intention of reselling the

for a profit. Precious metals and collectibles are not necessarily a good investment for a

number of reasons, but they can be classified as an investment nonetheless. Like a house, they

have a risk of physical depreciation (damage) and require upkeep and storage costs that cut

into eventual profits.

Lending Investments

Lending investments allow you to be the bank. They tend to be lower risk than ownership

investments and return less as a result. A bond issued by a company will pay a set amount

over a certain period, while during the same period the stock of a company can double or triple

in value, paying far more than a bond - or it can lose heavily and go bankrupt, in which case

bond holders usually still get their money and the stockholder often gets nothing.

Your Savings Account

Even if you have nothing but a regular savings account, you can call yourself an investor. You

are essentially lending money to the bank, which it will dole out in the form of loans. The return is pitiful, but the risk is also next to nil because of the Federal Deposit Insurance Corporation (FDIC).

Bonds

Bond is a catchall category for a wide variety of investments from CDs and Treasuries to

corporate junk bonds and international debt issues. The risks and returns vary widely between

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the different types of bonds, but overall, lending investments pose a lower risk and provide a

lower return than ownership investments.

Cash Equivalents

These are investments that are "as good as cash," which means they're easy to convert back

into cash.

Money Market Funds

With money market funds, the return is very small, 1 to 2%, and the risks are also small.

Although money market funds have "broken the buck" in recent memory, it is rare enough to be

considered a black swan event. Money market funds are also more liquid than other

investments, meaning you can write checks out of money market accounts just as you would

with a checking account.

Close, but Not Quite

Your education is called an investment and many times, it does help you earn a higher income.

A case could be made for you "selling" your education like a small business service in return for

income like an ownership investment.

The reason it's not technically an investment is a practical one. For the sake of clarity, we need

to avoid the ad absurdity of having everything be classified as an investment.

We'd be "investing" every time we bought an item that could potentially make us more

productive, such as investing in a stress ball to squeeze or a cup of coffee to wake you up. It is

the attempt to stretch the meaning of investment to purchases, rather than education, which has

obscured the meaning.

NOT INVESTMENT

Consumer purchases - beds, cars, TVs and anything that naturally depreciates with use and

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time - are not investments. You don't invest in a good night's sleep by buying a foam pillow, or

invest in entertainment by buying an mp3 player. Unless you're very famous, and even then, it's

a stretch, since you can't reasonably expect someone to pay more for your pillow than the initial

purchase cost. Don't take it personally, but there's very little demand in the second-hand pillow

market.

The Bottom Line

There are three types of investments: ownership, lending and cash equivalents. There is no

fourth category of consumer purchases. Admittedly, it's a clever piece of advertising that

removes some of the guilt from impulse purchasing; you're not spending money frivolously,

you're investing! The decisive test is whether there is a potential to turn a profit. The important

word is "potential" because not every legitimate investment makes money. Making money

through investing requires researching and evaluating different investments, not simply knowing

what is and is not an investment. That said, being able to see the difference between an

investment and a purchase is an essential first step.

FACTOR TO CONCIDER BEFORE INVESTING

One of your budgeting goals may be to have extra money that is not spent during the

month.You may be accumulating this extra money to spend on something big within the year

without going into debt – for things like a new furniture or gadget. For this, you need to

accumulate your money in a savings account. The savings account may be earning you next

to nothing in interest, but it will keep your money safe for the purchase. A savings account is a

good place to keep your money if you have a short term goal for saving.

For accumulating money to reach a long term goal, say, for 2 or more years, you need to put your money in a place where your money should potentially earn more. For getting your child into college, setting up a business, or a retirement, you need to invest.

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Investing is making your money grow at a rate that is faster than putting it in a savings account.

It is a way of saving your money for something further ahead in the future. Although investing

carries risks for your money, it will potentially give you a much higher return.

Also, the money that you save for the long term is going to be affected by inflation. Inflation,

which is the rising price of things, makes your money worth less and less over time. The

interest you earn on savings account usually cannot cope with inflation. You need to put it in

an investment where your money grows to retain its value or even increase in value.

Before investing, you should first consider these factors that will determine when, where, and

how to invest:

1. Best use for your money

The most important factor to consider if it is the right time for you to invest is to look at the best use of your money.

For example, wouldn’t it make more sense to pay your debt? The money you are spending on the interest of your high credit card debt may be higher than what you might earn when you invest. For example it makes sense to pay off that credit card debt that is costing you 20% per year, before investing on mutual fund or stocks where you realistically expect to earn 10% or less.

Also more important, you should protect yourself from the financial catastrophes that could wipe

out all your investments, or worse, put you into a big burden of debt when they happen. This

can be done by buying insurance before investing.

First of all, make sure that you have adequate health insurance, to protect your money against the high cost of being treated for health problems. A disability insurance is also a good idea because a disability can wipe out your savings very fast.

See details on what you should know about insurance.

Build up a cash cushion of 3 to 6 months expenses or salary in case you become unemployed, or as protection from emergencies. Make sure that you place this money in an instrument that you can easily convert into cash and you are not putting your money at risk, like high interest savings account, Certificate of Deposits or Money Market Fund.

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2. Your objective for investing

A factor that determines where to invest your money is your objective for investing.You may want to hopefully grow your money fast and you do not care if you risk it because you have more time to pick yourself up and recover from a downturn. Or your goal is just to preserve your capital in the safest way because you will need your money soon, and it is important that it does not lose its value.

These different goals are compatible with different kinds of investments or mix of investments, as follows:

Keeping your money relatively safe because you need it soon – if you are close to retirement, you would not want your money to decrease in value just when you are about to retire. Therefore if you have a financial goal that is near, investing in less risky instruments makes sense. Investments in mostly bonds are suitable here. Bonds are safe instruments.

Taking moderate risk with your money for better appreciation – if you can afford to take a little risk with your money because you will not need it soon, then buying an investment like a mix of stocks of very stable companies that pays out dividend (income) and stocks of company that do not pay out dividend but reinvest its earnings in its future is a good choice for you.

Taking aggressive risks for higher gains – if you can afford to take a risk with your money for higher gains, then growth should be your goal. You should invest in stocks of companies that plow its earning s back into its future. This is appropriate if you can keep your investment for a long period of time because it takes time for some companies to make its value increase sizably.

It is also possible that you can invest for two different goals, such as investing for a house down payment (short term), and investing to retire (long term).

3. Your Age

A factor you should consider to determine where to put your investment and how much to invest is your age.

In investing, being young has an advantage. You are able to wait a longer time for your investment to bear fruit. While young, you are also more secure, you do not have a lot of responsibilities, you have more disposable income, and you can pick yourself up easier when you make mistakes. Therefore, when you are young, you can get into investments that are riskier but can potentially earn above average earnings.

Another advantage of being young is that you have more time for compound interest to work for you. Compound interest is earning interest on your interests as well as principal, and this makes your money grow at a faster rate over time.

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If you are young, it is not very important to put in a lot of money for investment if you have very long term goal such as retirement.

On the other extreme, if you are middle aged and thinking about retirement, but you are just starting to save for retirement, you should invest the maximum amount you can afford so you can live comfortably when you retire. You should also put your money in a relatively safe investment, so there is very little risk of losing much of it by the time you retire.

Since stocks are relatively riskier investments than bonds, a formula you can follow to determine how much percentage of stocks you should hold (vs. bonds and other safer instruments) is 120 minus your age.

4. Time before you need the money.

Not everyone invests to retire, some investments have shorter goals. Therefore, another factor you should consider to determine where to invest is the time you have before turning your investment into cash.

The longer you can stay invested, the more you can take risk (and hopefully get more gain) since you can still recover from any potential loss. If you do not have a lot of time and taking a loss would be disastrous to your plan, then it is best to stick to less risky investments like bonds.

Also consider that some investments will cost you charges or penalties if surrendered or redeemed before a holding period. If this is a requirement, make sure that you do not need the money before the prescribed redemption period.

You should also consider the tax implications of withdrawing your investment.

5. Risk tolerance

As a general rule, the higher the risk of an investment, the more potential for higher return.However, not everyone can take risks with their money over a certain level. Not everyone is comfortable with the ups and downs of the stock market, for example. You may be so averse to risking your money that a potential higher rate of return may not be worth the stress and your losing sleep.

If your personality is one who can accept losing money for the possibility of getting much more profit on your investment, choose aggressive investments such as growth stocks.

If you are the more conservative type, choose the relative safety of bonds.

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INTRODUCTION OF GOLD

Gold – valued as a currency, commodity and investment for thousands of years – is popular among today’s investors because it can be used as a hedge against currency devaluation, inflation or deflation, and due to its ability to provide a "safe haven" during times of economic uncertainty. The gold market is highly liquid and there are a number of ways in which investors can gain exposure to this precious metal, including holding physical gold (i.e., gold coins and bars) and exchange traded funds (ETFs).

Physical Gold

Physical gold provides the most direct exposure to gold. Gold in bulk form is referred to asbullion, and it can be cast into bars or minted into coins. Gold bullion’s value is based on its mass and purity rather than by a monetary face value. Even if a gold coin is issued with a monetary face value, its market value is tied to the value of its fine gold content.

Investors can buy physical gold from government mints, private mints, precious metal dealers and jewelers. Because different sellers may offer the exact same item at different prices, it is important to do your research to find the best deal. When you purchase physical gold, you must pay the full price.

Physical gold ownership involves a number of costs, including storage and insurance costs, and the transaction fees and markups associated with buying and selling the commodity. There can also be processing fees and small lot fees for investors making small purchases. While collectively these costs may not significantly affect someone looking to invest a small portion of their portfolio in gold, the costs may become prohibitive for investors seeking to gain larger exposure.

Why Invest in Gold

Gold is respected throughout the world for its value and rich history, which has been interwoven into cultures for thousands of years. Coins containing gold appeared around 800 B.C., and the first pure gold coins were struck during the rein of King Croesus of Lydiaabout 300 years later. Throughout the centuries, people have continued to hold gold for various reasons. Below are eight reasons to own gold today.

A History of Holding Its Value

Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages.

People see gold as a way to pass on and preserve their wealth from one generation to the next.

Weakness of the U.S. Dollar

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Although the U.S. dollar is one of the world's most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices. The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008 and nearly doubling between 2008 and 2012, hitting around the $1800-$1900 mark. The decline in the U.S. dollar occurred for a number of reasons, including the country's large budget and trade deficits and a large increase in the money supply.

Inflation

Gold has historically been an excellent hedge against inflation, because its price tends to rise when the cost of living increases. Since World War II, the five years in which U.S.inflation was at its highest were 1946, 1974, 1975, 1979 and 1980 (as of 2012). During those five years, the average real return on the Dow Jones Industrial Average was -12.33%, compared to 130.4% for gold.

Deflation

Deflation, a period in which prices decrease, business activity slows and the economy is burdened by excessive debt, has not been seen globally since the Great Depression of the 1930s. During that time, the relative purchasing power of gold soared while other prices dropped sharply.

Geopolitical Uncertainty

Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the "crisis commodity," because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments. For example, gold prices experienced some major price movements this year in response to the crisis occurring in the European Union. Its price often rises the most when confidence in governments is low.

Supply Constraints

Much of the supply of gold in the market since the 1990s has come from sales of goldbullion from the vaults of global central banks. This selling by global central banks slowed greatly in 2008. At the same time, production of new gold from mines had been declining since 2000. According to BullionVault.com, annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007 (however, according to Goldsheetlinks.com, gold saw a rebound in production with output hitting nearly 2,700 metric tons in 2011.) It can take from five to 10 years

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to bring a new mine into production. As a general rule, reduction in the supply of gold increases gold prices.

Increasing Demand

In previous years, increased wealth of emerging market economies boosted demand for gold. In many of these countries, gold is intertwined into the culture. India is one of the largest gold-consuming nations in the world; it has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold (though it has taken a tumble in 2012.) In China, where gold bars are a traditional form of saving, the demand for gold has been steadfast.

Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, SPDR Gold Trust, became one of the largest ETFs in the U.S., as well as one of the world's largest holders of gold bullion in 2008, only four years after its inception.

Portfolio Diversification

The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out:

The 1970s was great for gold, but terrible for stocks. The 1980s and 1990s were wonderful for stocks, but horrible for gold. 2008 saw stocks drop substantially as consumers migrated to gold.

Properly diversified investors combine gold with stocks and bonds in a portfolio to reduce the overall volatility and risk.

Types of Gold InvestmentThere are several different ways in which you can invest in the commodity of gold. People often assume that buying gold coins or gold bars is the only way to invest in gold, and it is true that physically buying gold in these forms is certainly a very straightforward to benefit from a rising gold price, and is an option well worth considering. Buying gold bullion has become increasingly popular with your average investor in recent years; partly as owning gold has become a more attractive proposition in light of various economic uncertainties but also as it has become so easy to buy gold online.

However, there other ways to invest in gold that you might also want to think about and in this section we provide detailed information about the different types of gold investment, including physically buying gold. If you are planning to invest in gold then we would certainly recommend that you take the time to read through this section and explore all the options available to you.

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You may find that there are certain gold investments that fit in very well with your personal investment strategy and objectives. The following types of gold investment are all covered in this section:Gold Types

Gold Bars

Gold Bullion Coins

Collectible Gold Coins

Gold Certificates

Gold Exchange Traded Funds

Gold Stocks

Gold Futures

Gold Bars

Buying gold bars is one of the easiest ways to invest in gold. There are a number of gold dealers that specializing in supplying gold bars and bars tend to be available with very low premiums, particularly if you buy gold online. Buying gold bars online is really straightforward, and it is easy to compare prices at different online gold dealers to ensure you are getting the best deal possible. There are a number of things you need to consider when buying gold bars, such as where you will store them for example, but buying gold bars is a very viable option for anyone looking to invest in gold – particularly those that are looking to buy gold in large quantities.

For more information on this particular form of investing in gold, please read our dedicated page on Gold Bars. You will find details on both the advantages and disadvantages of buying gold bars, information on how buying and selling gold bars works and also on some of the more commonly available types of gold bars.

Gold Bullion Coins

Buying gold bullions coins is another fabulously simply way to invest in this precious metal. As with gold bars, there are plenty of gold dealers that offer a wide selection of gold coins for sale. You can also buy gold coins online, and again this is usually the cheapest way to make such purchases. Gold bullion coins are a great option for anyone looking to invest in gold, no matter what budget is involved, as you can buy gold coins in a variety of different sizes.

Please read our page about Gold Bullion Coins for more complete information on this subject. We include more on the benefits of buying gold coins, the different types of gold bullion coins that you can buy and also advice on how and where to buy gold coins.

Collectible Gold Coins

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Collectible gold coins are not usually the first thing people consider when deciding how to invest in gold. However, there is plenty of potential for profit in buying collectible gold coins if you know a little about what to look for and are prepared to do some research. Buying collectible gold coins is not quite as straightforward as buying bullion coins or gold bars, but the rewards can definitely be worth the extra effort.

If you are interested in investing in gold in this way, please read our page on Collectible Gold Coins. We explain the concept of numismatic value and some of the factors that affect the value of collectible coins, and also provide some useful advice.

Gold Certificates

Gold certificates represent an excellent way to buy gold without the complications of having to actually take delivery of a pile of gold and then store it and look after it. Buying gold certificates is another really straightforward way to invest in gold, and is an option that is well worth considering. If you like the idea of owning gold, but don’t want to worry about storing the stuff, then buying gold certificates could well be the best way for you to go.

For more information on gold certificates and their advantages, and the differences between buying allocated gold and unallocated gold, please read our page on Gold Certificates.

Gold Exchange Traded Funds

There are plenty of ways to invest in gold other than physically buying gold and storing it, and some of these may be more appealing to those investors that are perhaps more familiar with investing on the stock markets than they are with holding a valuable commodity. One such method of gold investment is gold exchange traded funds; an investment option that is open to anybody and reasonably simple to understand.

For further information on buying gold exchange traded funds, and other similar products, please read our page on Gold Exchange Traded Funds.

Gold Stocks

As we have referred to above, there are investors who perhaps feel comfortable with buying stocks and other financial instruments through stock exchanges but might not feel quite so at ease in physically buying gold and having to store it. However, such investors may still have an interest in buying gold in some form, as part of their investment strategy. Gold stocks represent a great solution in such cases, and indeed anyone interested in gold investment should at least lend some consideration to buying gold stocks.

Please read our page on Gold Stocks for more information on this method of investing in gold, how it differs from buying gold bullion and the risks and rewards involved. We also have some information on how to buy gold stocks, including buying gold stocks online.

Gold Futures

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Buying gold futures is one of the more complex, and riskier, ways to invest in gold. As a general rule we would not advice buying gold futures unless you have some decent level of investment experience, or at least have someone who can offer you some advice and guidance on what to do. Although the basic concept of gold futures is not that difficult to understand, investing in gold in this way can carry significantly higher risks. There is also the potential for great returns through buying gold futures too, so there are reasons why investors do like to speculate on gold futures.

If you would like to know more about gold futures, how they work, and where to buy them, then please visit our page on Gold Futures.

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Things to Consider Before Investing in Gold

Over the years, various global financial crises have resulted in an increase in the number of people looking to invest in gold. Because of this demand and the potential of future fiscal uncertainty, gold typically trades at a premium price. This is due to the fact that owning gold is seen by many as controlling one’s own wealth. It is also viewed as a hedge against inflation and global turmoil. Gold is a timeless investment whose luster has commanded attention for centuries. It has served as an alternative to paper money and is considered foolproof. People all over the world recognize its value.

Just like other investments, it is important that individuals educate themselves on benefits and pitfalls associated with precious metal investing. When the proper steps are followed, an investment in gold can be very rewarding and fulfill its purpose as a hedge against monetary and global uncertainty. Gold can also be a profitable investment if the purchaser understands the risks involved.

1. Short-term Market Volatility

Large financial institutions, governments, and central banks actively trade in the gold market. Global turmoil, a change in interest rate policies, or fluctuations in currency exchange rates can cause the spot price of gold to change significantly from one day to the next. The resulting volatility usually prohibits anyone except the most seasoned traders from profiting in the short term. This volatility affects the daily spot price of gold. It is critical to understand that these daily swings in the spot price will affect the value of a portfolio creating short-term gains or losses.

2. Long-term Trend

While there may be ups and downs in the short term, the long-term trend in gold is toward higher prices. Gold should be purchased as part of a long-term investment strategy because it holds its value. In ancient times, an ounce of gold could purchase a well-made suit of clothes. That is still the case today. Investment advisors typically recommend to their clients that approximately 10 percent of their portfolio be in gold. Although the price of gold may fluctuate in the short term, it is considered an essential element of a long-term buy and hold strategy.

Some investors purchase gold when there is a threat of inflation, economic uncertainty, and global turmoil. Investment advisors recommend that their clients adopt a long-term perspective on gold and disregard short-term trends and fluctuations in the price. This strategy reduces the risk that investors will make emotional decisions. Because it is difficult to determine the best time to purchase gold, advisors generally recommend that investors purchase gold regardless of economic or political conditions.

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3. Physical Gold versus Paper Gold

It is possible to buy actual gold bars, ingots, nuggets, or coins. Investors can also buy paper assets, such as mutual funds, exchange traded funds, and limited partnerships that, in turn, invest in gold, stocks, or other gold-related investments. It is important to understand the difference. When purchasing gold as an investment or as a hedge against future uncertainty, physical gold is the best option. Gold-related investments may not be available for redemption if the commodities markets are closed.

4. Diversification

When purchasing gold, it should be acquired over time at regular intervals, not all at once. This technique is called dollar cost averaging. Following this investment strategy lowers the overall cost basis of the portfolio because, as the price of gold fluctuates, some transactions will be at a lower price than others. The result is investors being able to acquire a larger portfolio over time based on an available budget.

Gold bars are available in different sizes. It is possible to buy gold in weights of one gram, one ounce, one kilo, and even a full 400-ounce gold bar. Gold bullion and bars should be purchased in various weights. This enables an investor to sell limited amounts more quickly if the need should present itself as the amount will be appealing to a wider range of buyers. Purchasing smaller sized lots may also enable an investor to buy gold with available funds if the spot price is low, rather than waiting for larger bars and possibly paying a higher spot price.

5. Gold Purity, Weight, and Spot Price

Before purchasing gold, an investor must know the purity and weight of the item for sale and the current spot price of gold. Because gold is a soft metal, it is necessary to alloy it with another metal when producing a coin, bar, or brick. The alloy makes the resulting item harder and more durable. The higher the purity, the more gold the item contains and the more valuable it is. The purity of a fine ounce, standard ounce, and troy ounce are 99.5, 91.66, and 99.99 percent, respectively. Gold is often quoted in a price per troy ounce. The weight of the gold in the item, determined by its purity, multiplied by the spot price determines the current value of the gold. Expect to pay the spot price when purchasing gold. Investors must know where to readily access the current spot price of gold in order to avoid overpaying.

6. Locating a Trusted Seller

In order for gold to be fully transferable, it must come from a respected source. The ease of liquidity is directly affected by how well-recognized the hallmark on the gold is by other investors. If a potential buyer does not respect the hallmark, it may be impossible to sell the gold

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coin or bar. Buying from established, well-known sellers reduces risk and enables investors to reselling their gold anywhere in the world at a fair price. The Bullion Center on eBay allows investors to filter the search by Featured Seller. These trusted dealers have amazing reputations. Your purchase is also covered by eBay Buyer Protection, which covers the purchase price and shipping costs in case of fraud.

7. Storing Gold

Once the gold bullion is purchased and received, it must be stored in a secure location. It is also important that the location and amount on-hand be kept confidential. It may not be wise to store all the gold at home or in an office. The small amount that is stored at home or at the office should be secured in a quality safe. Because no safe or home is burglar-proof, only store an amount of gold at home that you can afford to lose financially. A safety deposit box at a private bullion depository company is an excellent option. It is inexpensive, secure, accessible, and provides peace of mind. Another option is a bank safe deposit box. Although it is secure, it may not be as accessible as the one located in a properly insured, private depository. U.S. citizens may be able to store their gold with an IRA custodian.

Finding Gold on eBay

eBay has something for every investor, including small investors just starting out. The current increased interest in gold investments has resulted in a shortage of various denominations of coins and bars. The size and quantity that an investor is seeking may not be available at a local gold dealer. Larger, full service dealers typically require large purchases. The solution is shopping on eBay. There are always dealers looking to sell small amounts of gold and fractional coins. These sellers can take advantage of the efficiencies found on the eBay market site and sell small amounts of gold and other precious metals to other individuals. As a result, small and first time investors can purchase the quantity of gold that they wish to acquire. It may even be possible to purchase specialty items that aren’t available in traditional venues. Whether they are new or an educated and experienced investor, there is a wealth of opportunity on eBay for those who are patient.

There is a wide selection of gold bullion and coins from around the world at the current spot price and possibly even less. An investor can begin the search by placing the mouse on the All Categories link. The next steps are to select the Coins & Paper Money link followed by Bullion. It is also possible to locate exact items of interest by entering a specific description in the search box. Investors can also filter their search by All Bullion, Gold Bars, and Gold Coins. The search can be refined by brand and weight as well. Investors are free to browse the available selections once the items for sale pages have been reached.

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Conclusion

Gold has been a store of value for centuries and this trait continues today. A portion of a fully diversified investment portfolio should be allocated to gold and other precious metals as a hedge against inflation. The reasons for owning gold are as relevant today as they have always been. It is important that investors educate themselves in the factors that affect a gold purchase and consider purchasing their gold from the trusted sellers that can be found in the Bullion Center on eBay.

Factor that affect Gold Price

The price of gold is considered as a major indicator of the status of global economy.Gold prices depend on demand and supply in the gold market which is dominated by future market and speculation. Central banks can be the biggest player both as a seller and buyer. Gold prices increased because people ran to gold to help them hold on to the value of their savings.

There are 4 main factors that affect the price of gold.

1. Value of US dollar

The foremost factor that governs the price of gold is the value of US Dollar. A stronger US dollar will keep the price of gold controlled and low. A weak dollar will set the price of gold spiralling to a very high price. US economy plays a major role in shaping the macroeconomics of the world. When the dollar is strong, people invest, buy and trade in dollars.

However, in recent times, the US economy has suffered a lot. Dollar has not remained as powerful and promising as ever; this is the reason why people and nations start investing and hoarding in bullion. The high gold reserves strengthen the national economies and act as a hedge against inflation.

2. Production of gold

Due to the rising cost of production in gold mining, strikes by gold-miners, worsening political situation, the sharp increase in the oil prices after the Iraq war, and terrorist attacks, a decline in the gold-mining production has been recorded for the past 5 years. The world population is constantly rising, and so is the demand of investment in bullion. Man has always believed in investing in bullion since ages. So, the prices of gold are also affected by the natural desire of man to hoard gold.

3. Demand for jewellery by the China and India markets

China and India are the biggest buyers of bullion for their jewellery market. In the year 2004, Chinese citizens were granted the ownership of ignot for the first time in history. This triggered a very high demand of bullion, which subsequently affected the price of bullion worldwide. In

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2009, a record 32% decrease in the demand for gold-jewellery was recorded, due to the global economic crisis, which resulted in a slight decline in the gold-price.

4. Central Banks Reserves

Central banks keep ignot reserves as a hedge against inflation. Other monetary policies of the central banks also affect the price of gold. Low interest rates discourage people to invest in paper money; they turn towards the golden metal in the hope of better returns. If the central banks give high interest rates, the chances are that the ignot price will fall.

Why Gold prices different in other countries?

The global price for gold is fairly constant but if a country wants to “get more” or “get ride of more” they will post a different price so that global buyers can easily manipulate the market.

ADVANTAGES OF OWNING PHYSICAL GOLD

The Tangible Factor:

Many people don’t understand exactly what “buying precious metals” means. For those looking to purchase gold and silver you need not complicate things. If you are in the market to invest in these timeless commodities then take it from the professionals – just buy the real thing.

Stay Away From Gold ETF’s

ETF’s or Exchange Traded Funds are not real gold. You are only buying shares. This means you are investing in internet one’s and zero’s which hold no physical/tangible presence. If your wealth is tied up in what you cannot see – how can you trust it?

Exactly What “Buying Precious Metals” Means

If you are going to invest your hard-earned money into something, you should be able to see it, touch it, and easily transfer it from one party to another. When you buy gold and silver, you need to buy the real physical items. Forget the stock market for now and focus on what you can trust.

Look to purchase gold and silver bars and coins. These items are real and are a sound investment. When you own the real thing, you then have the power to instantly control the fate of your wealth. When another economic crisis hits, where will your wealth be tied up? Will you

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scramble to your bank or broker only to find your money has vanished? Take control of your wealth today.

Flexibility

The economy has a façade of being calm at the moment. However, as the end of 2012 approaches there will be many changes that take place here in the USA and elsewhere in the world. Political parties change, wars are waged and businesses still fail.

Being flexible with your wealth means when the economic circumstances of your country are heading south, you need not go with it. You (who had the foresight to buy gold and silver) can easily take your metal money anywhere in the world – and it will still be good.

Paper money, on the other hand, means nothing really. Its value is based on the performance of that respective nation’s economy. The dollar has been through a hurricane in the past few years and sadly, we may only be in the eye of the storm.

A Safe Haven That Only Gets Sweeter

After you transfer your dollars into gold you have instantly help your financial situation in two ways. First, you have transferred your wealth into a more stable form of currency. The dollar may go up or down, but your gold assets are steady like a rock. Second, and most importantly, the value of your gold will grow overtime. Gold has been steadily growing in value for many years and this safe haven know as gold and silver will only get sweeter with time.

The Bottom Line

Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term. Through the years, it has served as a hedge against inflation and the erosion of major currencies, and thus is an investment well worth considering.

Disadvantages of investing in Gold

If there is something positive about it that makes people want to purchase gold in droves, then there are going to be some negatives that make you think twice, too.

These things are real concerns, though most people agree that the advantages outweigh the negatives and they purchase gold anyway. These disadvantages are listed below.

1. High making charges : You have to pay very high making charges, especially if you go for exotic designs. The making charges vary according to design, but on an average, it will be around Rs 200 per gram. Considering the prevailing price of 22 carat gold that is used in

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jewellery, this works out to be a 10% mark-up. Note that investors will never be able to recover these costs if they decide to sell the jewellery.

2. Impurity : The purity of gold is another problem that one encounters in case of jewellery. Most of the time, it may not be of the level that is being claimed. Though this problem has receded due to the widespread use of ‘hallmarking’, it has not been resolved completely. Since the hallmarking services test only a fraction of the gold jewellery submitted for testing, there are concerns with the hallmarked jewellery as well.

3. Less resale value : Most jewellers are ready to exchange the gold sold by them at market rate and very few are willing to pay in cash. Most of them deduct 5-10% of the value if you want hard cash. The deduction is higher if you try to sell gold that has been bought from some other jeweller. This is because he will question the gold’s purity, claiming it to be supect, and pay you less.

4. No regular income : Gold investment does not provide any current income like dividend or rental as in Stocks or real estate where investors can reap the rewards of their investment without having to sell their asset.

5. Problems in Physical storage : Lack of investment in gold is the factor of storage / treatment / handling. Storing Gold in large quantities relatively risky and expensive. However, there are possibilities for gold investment in a form of a certificate or an account in which the owner does not held the physical gold but later can represent it. Although there are well established forms of gold investment today, some may still wonder whether such form of gold investment will be still equally reliable in case of a system breakdown. Also, if storage is not good, though wrapped in protective cover, allowing the oxidation and discoloration.

6. No Financing or Leverage: When you invest in gold, you will need to have all of the cash on hand to make a purchase. You cannot use leverage, or any type of financing, for this type of investment or purchase. This can severely limit the amount of people that can get involved in the market.

7. No Tax Advantage: Investing in gold is not going to provide you with any type of tax advantage in contrast to other tax saving instruments available in market.

8. Subject to Confiscation: One of the biggest risks of investing in gold is that it is subject to confiscation. The government could come in and confiscate all of the gold in a warehouse if they deem it necessary. In that case, there is nothing that you can do about it and you will lose your investment.

9. Actual returns are less than nominal returns: If gold does go up in value, the gain is nominal rather than an actual increase in buying power. This is because when gold appreciates it typically coincides with devaluation for paper money. Moreover, those gold profits are taxable.

10. Partially Liquid : An unfortunate social aspect in most families in India related to liquidity is that gold has sentiments attached and is the last item to leave in case of financial difficulties. This negates the entire purpose of gold as an liquid asset.

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11. Massive growth potential is limited right now : Gold has seen a near meteoric rise in value over the past few decades, but it was in a bear market from past 20 years after a rise in 1980’s as indicated in below chart. Talking about historical returns, gold has given 20-24% returns in past 5 years but has given only 7-8% returns in past 30 years. It shows that gold has been able to beat inflation which is as equivalent to investing in fixed deposit rather than providing huge returns.

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So it fares poorly in terms of real inflation adjusted returns in comparison to shares or real estate. The problem for gold in growth terms is that the market itself is highly evaluated. After a great run in past 5 years, Everyone knows the value of investing in gold and that takes away a lot of the opportunity. In other markets, there are opportunities and sectors where people still have not discovered the potential that exists.

Gold ETFs

Unlike physical gold, ETFs can be purchased on margin, meaning that investors only front a percentage of the investment’s value. ETFs allow investors to access gold while avoiding the costs and inconvenience of markups, storage costs and security risks of holding physical gold. An investor will lose a percentage of his or her investment’s value each year to the fund’s expense ratio. An expense ratio is the recurring annual fee charged by funds to cover its management expenses and administrative costs. The largest gold ETF – the SPDR Gold Shares ETF – for example, has an expense ratio of 0.40%. That means an investor would pay $80 per year in fees for a $20,000 investment.

What is an Exchange-Traded Fund?

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An exchange-traded fund (or ETF) is an investment traded on stock exchanges that represents an asset and trades at near the net value of that asset. ETFs are low cost, tax efficient, stock-like features. However, the only holders that can actually obtain shares, or actual physical portions of the underlying asset are so-called authorized participants, which are typically large institutional investors, and only in large portions of shares.

What is a Gold ETF?

A Gold ETF is a legal trust that functions by tracking the price of gold after trust expenses. It stands as a "derivative" because it is a piece of paper that is derived from the movement of the underlying asset, gold. It is also a derivative because a Gold ETF shareholder can never take physical possession of any of the gold, unless the shareholder owns 100,000 or more shares. GLD is one type of a Gold ETF.

Why does GLD lack the benefits of physical gold ownership?

The value of the price of GLD stock and the value of the Trust have the potential to experience enormous losses, and under specific circumstances may lose value entirely. As outlined in the GLD Prospectus the following are elements, which make GLD an unsafe investment:

- Owning GLD is not an investment in actual gold.

- The legal structuring of GLD allows for unsuspecting investors to potentially lose all of their money.

- The structure of the GLD Trust makes it impossible to determine if the gold in the Trust is being leased. This is problematic because if the Trust is leasing gold there are inherent difficulties in replacing the leased gold should it be defaulted upon. If this is the case, shareholders have nearly no legal ability to seek recovery from the Trust or the Custodian.

- GLD does not promise that any gold is in the Trust.

- There is no legal way to make the Trustee or Custodian (the gold holder, which is leasing the gold from the Trustee) prove that the Custodian has its leased gold in its vault. In addition, the Custodian can use "subcustodians" to keep the gold. And, the subcustodians can use their own subcustodians.

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- Legal barriers set up in the GLD Trust prevent anyone from physically verifying that the GLD Trust holds more than just an IOU. The Trustee and the Custodian may not monitor or visit the site of any subcustodians, or subcustodians of the subcustodians, to verify that their leased gold is in fact in their vault.

- Subcustodians do not need to cooperate in Trustee reviews of the facilities, procedures, records or creditworthiness of said subcustodians.

- The Prospectus outlines that there will be no written contractual agreements between subcustodians and the Custodian or the Trustee, thereby making it impossible to have legal repercussions for the misuse or loss of leased gold. The Prospectus further states that "failure by the subcustodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust."

TYPES OF ETF

Some of the more popular ETFs have nicknames like cubes (QQQ) and diamonds (DIAs). Most ETFs are passively managed, meaning investors save big on management fees. Below you will find a closer look at some of the more popular ETFs:

Nasdaq-100 Index Tracking Stock (Nasdaq:QQQ)

This ETF represents the Nasdaq-100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq, QQQ offers broad exposure to the tech sector. Because it curbs the risk that comes with investing in individual stocks, the QQQ is a great way to invest in the long-term prospects of the technology industry. The diversification it offers can be a huge advantage when there's volatility in the markets. If a tech company falls short of projected earnings, it will likely be hit hard. Between 2000 and 2004, QQQ was by far the most heavily traded index fund.

SPDRs

Usually referred to as spiders, these investment instruments bundle the benchmark S&P 500 and give you ownership in the index. Imagine the trouble and expenses involved in trying to buy all 500 stocks in the S&P 500! SPDRs allow individual investors to own the index's stocks in a cost-effective manner. Another nice feature of SPDRs is that they divide various sectors of the S&P 500 stocks and sell them as separate ETFs, there are literally dozens of these types of

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ETFs. The "technology select sector index", for example, contains over 85 stocks covering products developed by companies such as defense manufacturers, telecommunications equipment, microcomputer components and integrated computer circuits. This ETF trades under the symbol XLK on the AMEX.

iShares

iShares is Barclay's (Barclay's Global Investors "BGI") brand of ETFs. In 2009 there were approximately 350 iShares trading with around $300 billion under management. Barclay has put out a number of iShares that follow many of the major indexes around the world including the Nasdaq, NYSE, Dow Jones, and Standard & Poor's. All of these particular ETFs trade on the major exchanges in the U.S. just like normal stocks.

United States Natural Gas (NYSE:UNG)

Funds can also provide a way to invest in natural resources. This investments gives a replication of natural gas prices, after expenses. It will try to follow the prices of natural gas by buying futures contracts on natural gas in the coming months. As with all funds you need to keep an eye on the total expense ratio before investing.

iShares MSCI Emerging Market Index (NYSE:EEM)

This investment attempts to mimic the returns seen in the MSCI Emerging Markets index which was created as an equity benchmark for international security performance. If you would like to gain some international exposure, specifically to emerging markets, this ETF might be for you.

Vanguard ETFs

Just like iShares are Barclay's brand of ETFs, Vanguard ETFs are Vanguard's brand of the financial instrument. Vanguard also offers dozens upon dozens of ETFs for many different areas of the market including the financial, healthcare and utilities sectors.

Direxion Daily Financial Bear 3X Shares (NYSE:FAZ)

Not all ETFs are designed to move in the same direction or even in the same amount as the index they are tracking. For example, this triple bear fund attempts to perform 300% in the opposite direction of the Russell 1000 Financial Services Index. This fund became popular in 2008 and 2009 when the financial crisis placed downward pressure on financial stocks.

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DIAMONDs

These ETF shares, Diamonds Trust Series I, track the Dow Jones Industrial Average. The fund is structured as a unit investment trust. The ticker symbol of the Dow Diamonds is (NYSE:DIA), and it trades on the New York Stock Exchange.

Conclusion

A great reason to consider ETFs is that they simplify index and sector investing in a way that is easy to understand. If you feel a turnaround is around the corner, go long. If, however, you think ominous clouds will be over the market for some time, you have the option of going short.

The combination of the instant diversification, low cost and the flexibility that ETFs offer, makes these instruments one of the most useful innovations and attractive pieces of financial engineering to date.

Things to Know Before Investing in ETFs

Buying an ETF is just like buying an equity. You bid a certain price or you take out the offering price. Simple as that. However, before you get started and place that call to your broker, you should conduct due diligence about adding ETFs to your portfolio. Here are some things you should consider before making that final purchase

1. Remain Focused. What are you trying to achieve? Does the ETF you're looking at help achieve that goal? "If not, why are you looking at it? Don't get distracted with stories and ideas that don't help meet your objectives," says Robert Jergovic, chief investment officer of CLS Investments.

Narrow your opportunity set. "What are your options? What ETFs are available that meet your particular investment need?" asks Jergovic. Start your portfolio construction by considering your long-term financial plan -- that is what should drive your asset-allocation decisions. Your goals, state of life, and other considerations will determine which "buckets" you need to invest in -- stocks, bonds, commodities, real estate, etc. -- and how much should be in each bucket. You can use ETFs to fill your buckets, says Jerry Miccolis, chief investment officer of Brinton Eaton.

2. Define Your Diversity Goals. Diversification means more than selecting different asset classes to invest in. "It means diversifying your portfolio across different investment styles (tactical, strategic, fundamental, technical, long-only or long/flat or long/short), asset classes

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and regions of the world," explains Noah Hamman, founder and CEO of AdvisorShares. "Make sure to not own too many of the same type of ETFs, giving you exposure to the same asset class, unless they are materially different," he adds.

3. Look Under the Hood. Some ETFs use cap-weighted baskets of securities, others use fundamental-weighted baskets, and some even use derivative products. Moreover, some rebalance fairly frequently, while others do so only on an annual basis. In fact, a few never do. There are even some now that use an active or quasi-active management style. "Each investment approach carries with it very different risk/return profiles and tax consequences," says David Twibell, president of wealth management for Colorado Capital Bank.

Hamman of AdvisorShares elaborates: "Many index ETFs look the same, but operate very differently. In my opinion, 90% of these are not indexes, but strategies. Regardless of what you call them, make sure you know how the investment strategy operates and what the true risks are. Talk about that risk with your advisor or the product sponsor so you understand what the tax implications of the index methodology or investment strategy are, and if the ETF has successfully executed its investment objective or tracked the underlying index as designed."

4. Know Why You Own It. "Too many investors end up with securities acquired over long periods of time and they often forget why they owned them to begin with. Don't invest and forget. Write down why you bought in the first place and why it fit in your allocation," says Jergovic. Then keep track of that information, to make sure that the reasons still apply.

5. Analyze Fees. ETFs can have cost advantages or disadvantages, depending on their use. As a general rule, ETFs have higher trading costs but lower ongoing expenses than their comparable mutual fund cousins, says Joe Spada, managing director of Summit Financial Resources. This makes ETFs ideal for larger investments made less frequently and are intended to be held for longer periods of time. For smaller, more frequent purchases, a comparable passively managed mutual fund may provide lower total cost of ownership, he adds.

Take advantage of the commission wars. Charles Schwab (SCHW) launched its own line of exchange-traded funds in November that trade with no commissions, and recently, Fidelity announced that it is offering a suite of 25 iShares ETFs commission-free. But keep your perspective. "The question you should ask yourself is: What ETF fits my current situation and investment strategy?" says Hamman. "Would you use the cheapest surgeon you could find? Would you hire the cheapest caregiver for your children? Why do that for your financial assets? Find the best vehicle that provides the most services for a great value."

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6. Ensure Liquidity. As of Monday, Morningstar (MORN) listed 961 ETFs with combined assets of over $770 billion. The top 21 funds held half of all ETF assets while the bottom 435 funds held only 1%, notes Spada. The smallest funds had assets of just over $1 million each. That compares to the largest, the SPDR S&P 500 ETF, (SPY) with over $73 billion. Why does this matter? Some funds are ready for prime time, while others are not, says Spada. Second, many funds have either flawed strategies, too narrow of a niche, or both. The combination of these issues creates a third problem, poor liquidity. "Take a look at past trading volume to ensure that the ETF is truly liquid, and liquid enough so that you can readily sell it if you want to," says Mike Halloran, vice president of market strategy for BPU Investment Management.

"Avoid esoteric ETFs because they tend to have low trading volume and larger spreads. Getting into these funds may take days if volume is low and getting out could be a headache too, unless you are willing to take a haircut," says Jonathan Bergman, chief investment officer, Palisades Hudson Asset Management. There are some funds that go entire days with no trading whatsoever.

While an investor would desire the fund's share price to trade in-line with its underlying net asset value, this may be not be the case. Buying at a premium and/or selling at a discount is a quick way to lower returns, says Spada. To solve the liquidity problem, focus on larger funds that have earned their stripes and have an investor following. Substantial assets and daily trading volume are good proxies for both. Be aware of the share price in relation to underlying net assets, adds Spada.

7. Know your Risk Tolerance. Are you the type of person who can't sleep at night because you're worrying about your money? What's your risk tolerance and your true time horizon? The actual risk of an investment is very different from your risk tolerance, points out Hamman. "Understand that if you're going to invest in equities, you might lose 15% a year, and depending on how long you plan on being in the market, you might run into a 30% loss in a year." Be realistic about your time horizon; if you're 50 years old, it doesn't matter how stocks have performed over the last 30 years. After considering these points, look at the ETF you are considering and determine what the underlying risks are of that asset class/country/market capitalization (for an index ETF) or investment strategy (for an active ETF).

8. Have an Exit Strategy. What would cause you to change your mind and re-evaluate your position? Is the reason you purchased the ETF still valid? Have the fundamentals changed? Have the technicals changed? "Consider the use of a stop loss, even a mental one that causes you to re-evaluate your holding," says Jergovic.

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9. Beware of Leveraged ETFs. Leveraged ETFs have made quite a splash, says Twibell. "Investors need to understand that these funds are generally composed of derivative instruments and aim to provide investors with daily performance that tracks the underlying index (including leverage). Consequently, they can make very good short-term trading vehicles. Unfortunately, due to the nature of the derivative structure, they do not tend to track the underlying index well at all over longer-term horizons." Frankly, says Bergman, "They're only for professional traders making bets on a daily basis, not ordinary investors."

10. Separate Your Serious Money From Your "Ice Cream Money." Know the type of money you are investing in ETFs. Never speculate with serious money you cannot afford to lose, says Jergovic. "When investors speculate with serious money and invest long-term with ice cream money, meeting objectives becomes problematic."

How do ETFs work?

The most popular and straightforward ETFs are based on an indexing approach, which simply seeks to track the return of a target index. For example, a 2% rise or fall in the index should result in approximately a 2% rise or fall for an ETF which tracks that index.

ETFs are not traded directly with a fund management company. Instead, they are bought or sold any time during stockmarket trading hours directly with the exchange through a stockbroker. The open-ended nature of ETFs allows for the creation and redemption of shares in the underlying fund to meet investor demand.

Why are ETFs So Popular?

There are a number of reasons that an ETF might be a better investment option than either individual stocks or a mutual fund. Their primary advantage over individual stocks, of course, is that they allow the investor to purchase a diverse array of assets at once.

Mutual funds offer the same advantage, but ETFs are better than mutual funds in several ways. They're more flexible, since they can be traded on the stock market instead of being held until after markets close, the way mutual funds are. Savvy investors can buy and sell ETF shares quickly throughout the trading day in response to shifts in market value. Investors can also take advantage of different stock strategies with ETFs, such as selling them short, buying them on margin (borrowing money to buy stocks) and purchasing very small numbers of shares. Those things aren't possible with mutual funds.

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The cost of running an ETF is usually lower than a mutual fund. The fees paid to the custodial bank, the manager, the authorized participants and other involved parties (known as the fund's expense ratio) are clearly explained in the ETF's prospectus. These fees tend to be fairly modest, at least compared to some mutual funds. This is mainly because the fund manager doesn't actively manage the ETF like he or she might with a mutual fund, and thus takes a smaller fee. Also, because the creation of shares and the exchange between the ETF and the authorized participants is an in-kind trade, it doesn't trigger the kinds of capital gains taxes that a more straightforward sale of stock might.

Because ETF shares are freely exchangeable for the assets that make up the ETF, the value of the shares never deviates very far from the value of the assets, known as net asset value (NAV). If the shares increase in value, authorized participants can trade in assets for more creation units to sell on the market. This creates an increased supply of the shares, which pushes the price back down. If the opposite occurs and the ETF's shares are trading for a value less than the NAV, the shares can be traded back to the ETF in exchange for the assets themselves. This makes it almost impossible for the ETF shares' value to drop too far below the assets' value, since investors can always just trade the shares for the actual assets.

ETF Investment Strategies

ETFs provide considerable flexibility in implementing various investment strategies or building investment portfolios. Strategies range from very simple, such as diversifying an existing portfolio, to sophisticated hedging strategies.

Core Holding

An investor can consider using a few ETFs as core portfolio holdings. A low-cost diversified portfolio can easily be constructed with a few ETFs to cover the major equity asset classes and the fixed-income market. From that starting point, the investor can customize a portfolio with additional securities, mutual funds or other ETFs.

Asset Allocation

With ETFs, building a portfolio for any asset allocation strategy is easy. It is even possible to buy an ETF that is already diversified across different asset classes.

An investor can take a passive approach to asset allocation by rebalancing the portfolio only to ensure it returns back to the long-term or strategic asset mix. Alternatively, the investor can take an active role in asset allocation, by tactically rebalancing the portfolio, overweighting those asset classes that are expected to outperform in the shorter term and underweighting the others. (For more on strategies, read Asset Allocation Strategies.)

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Diversification

ETFs allow the investor not only to diversify across all the major asset classes, such as U.S. equity , foreign equity and fixed income, but also to diversify into investments that have a low correlation to the major asset classes. This includes areas like commodities, real estate, emerging markets, small cap stocks, and others.

Hedging

The use of ETFs allows for a variety of hedging strategies. Investors who want to hedge against a drop in the market can purchase inverse ETFs or leveraged inverse ETFs, which rise when the market falls. An investor concerned about inflation can hedge it by investing in commodities or inflation-protected bond Investopedia.com – Your Source For Investing Education.

ETFs. Investors that have investments out side the U.S. can hedge their foreign currency exposure with currency ETFs. Of course, investors can short an appropriate ETF that can hedge against a very specific stock market exposure. Many ETFs have options that can be used for other hedging strategies, either separately or in conjunction with the underlying ETF.

Cash Management

ETFs can be used to "equitize" cash, allowing investors an easy way to put their money in the stock market until a long-term investment decision is made. In this way, investors can ensure they do not miss out on price rises or forego income while their money is parked temporarily.

Tax-Loss Harvesting

Tax-loss harvesting is a strategy of realizing capital losses in a taxable account, and then redeploying the sale proceeds among similar investments, leaving the investor's portfolio largely unchanged. The wash-sale rule prevents an investor from selling a security at a loss and then immediately repurchasing it by disallowing the purchase of "substantially identical" securities within 30 days of a sale. With the availability of a wide variety of ETFs, buying an ETF that is very similar to the fund or stock being sold is easy. The end result is a portfolio that closely resembles the one before the capital losses were realized without invoking the wash-sale rule.

Completion Strategies

An investor might want to quickly gain exposure to specific sectors, styles or asset classes without having to obtain the prerequisite expertise in these areas. As an example, an investor

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who has no expertise in emerging markets can buy an ETF based on an emerging market index. Using ETFs allows an investor to easily fill the "holes" in his or her portfolio.

Portfolio Transitions

Many investors move portfolio assets between different advisors, managers or funds. In the transition period, the assets might be allowed to sit idle in cash. ETFs allow investors to keep their assets invested rather than having them dormant.

Advantages Of ETF’s

Diversification

One ETF can give exposure to a group of equities, market segments or styles. In comparison to a stock, the ETF can track a broader range of stocks, or even attempt to mimic the returns of a country or a group of countries. For example, you could focus on Brazil, Russia, India and China in a BRIC ETF. Mutual funds can be diversified as well, but the ETF has lower fees and trades more like an equity investment.

Lower Fees Compared to Managed Funds

ETFs, which are passively managed, have much lower expense ratios compared to other managed funds. A mutual fund's expense ratio is usually higher due to costs such as: a management fee, shareholder accounting expenses at the fund level, service fees like marketing, paying a board of directors, and load fees for sale and distribution.

Trades Like a Stock

Although the ETF might give the holder the benefits of diversification, it still trades like a stock.

ETFs can be purchased on margin and sold short. They trade at a price that is updated through out the day. An open-ended mutual fund is

priced at the end of the day at the net asset value. ETFs also allow you to manage risk by trading futures and option just like a stock. Because they trade like a stock you can quickly look up the approximate daily change of

a commodity or sector with the ticker symbol of a tracking ETF. Many stock websites also have better interfaces for manipulating charts than commodity websites and even provide applications for your mobile devices.

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Dividends Are Reinvested Immediately

The dividends of the companies in an open-ended ETF are reinvested immediately, but the timing can vary for index mutual funds. It should be noted that dividends in unit investment trust ETFs are not automatically reinvested, thus creating a dividend drag.

Capital Gains Tax Exposure Is Limited

ETFs can be more tax-efficient than mutual funds because most of the tax on capital gains is paid on sale and completely up to the investor. Even if the ETF sells or buys shares while attempting to mimic the basket of shares it is tracking. This is because the capital gains from in-kind transfers, seen in ETFs, do not result in a tax charge, and therefore can be expected to be lower compared to mutual funds.

Lower Discount or Premium in Price

There is a lower chance of having ETF prices that are higher or lower than the actual value. ETFs trade throughout the day at a price close to the price of the underlying securities, so if the price is significantly higher or lower than the net asset value, arbitrage will bring the price back in line. This is different than closed-ended index funds because ETFs trade based on supply and demand and market makers will capture price discrepancy profits.

Disadvantages Of ETF’s

May Be Limited to Larger Companies

In some countries, investors might be limited to large-cap stocks due to a narrow group of stocks in the market index. Only including larger stocks will limit the available exposure to mid- and small-cap companies. This could leave potential growth opportunities out of the reach of ETF investors.

Intraday Pricing Might Be Overkill

Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes. Some investors may trade more due to these lagged swings in hourly price. A high swing over a couple hours could induce a trade where pricing at the end of the day could keep irrational fears from distorting an investment objective.

Bid-Ask Spread Can Be Large

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As more niche ETFs are created you might actually find an investment in a low volume index. This could result in a high bid/ask spread. You might find a better price investing in the actual stocks (usually large institutional investors) or maybe even a managed fund.

Costs Could Actually Be Higher

Most people compare trading ETFs with trading other pools of stocks, such as mutual funds, but if you compare ETFs to investing in a specific stock, then the costs are higher. The actual commission paid to the broker might be the same, but there is no management fee for a stock.

Dividend Yields

There are dividend-paying ETFs, but the yields may not be as high as owning a high-yielding stock or group of stocks. The risks associated with owning ETFs are usually lower, but if an investor can take on the risk, then the dividend yields can be much higher. For example, you can pick the stock with the highest dividend yield, but ETFs track a broader market, so the overall yield will average out to be lower.

Leveraged ETF Returns

Certain ETFs, which are double or triple leveraged, could result in losing more than double or triple the tracked index. These types of speculative investments need to be carefully evaluated. If the ETF is held for greater than one day, the actual loss could be more than double or triple. For instance, if you own a double leverage natural gas ETF, a 1% change in the price of natural gas should result in a 2% change in the ETF on a daily basis.

However, as shown in the example below, if a leveraged ETF is held for greater than one day, the overall return from the ETF will vary significantly from the overall return on the underlying security. In the example, you can see the ETF returns correctly tracking 2 times the return of natural gas on a daily basis, but the overall return over eight periods does not (-2.3% vs. 0%). The ease of investing in leveraged ETFs could increase investments by individuals with less understanding. These investors may have never attempted to own a double or triple leveraged investment, but ETFs make it quite easy.

Double-Leveraged Returns

Period

Double Leveraged ETF

ETF % Change

Natural Gas Price

Nat. Gas % Change

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1 $10.00  -- $7.00  --2 $8.80  -12.00% $6.58  -6.00%3 $8.53  -3.04% $6.48  -1.52%4 $7.93  -7.10% $6.25 -3.55%5 $8.56  8.00% $6.50  4.00%6 $7.35  -14.15% $6.04  -7.08%7 $8.47  15.23% $6.50  7.62%8 $9.77  15.38% $7.00  7.69%Total %Change -2.28% -- 0.00%

A double-leveraged ETF does not always mean you will see double the return of the index. The table above does not take into account any fees. The double-leveraged ETF ends up down 2.28% when the price of natural gas has not changed.

The Bottom Line

ETFs are used by a wide variety of investors in order to build a portfolio or gain exposure to specific sectors. There are many advantages especially compared to other managed funds such as mutual funds. They are like stocks in the way that they trade but can also be compared to more broad investments even entire indexes in their price movements. There are also disadvantages to watch out for before placing an order to purchase these sometimes tricky investments. Furthermore, the tax implications associated with ETFsneed to be considered when deciding if ETFs are for you.

GLD vs. Physical Gold Ownership

Investing in GLD is not at all the same as investing in physical gold. In addition to the above factors, GLD fails to accurately reflect the price of gold. The premiums on physical gold products have grown from 10% to 40% over the spot price of gold over the past five years. This is not reflected in the price of GLD. If you invest in GLD with the intention of selling it in the future and using the profits to buy physical gold, you will find that your proceeds from GLD will purchase significantly less gold than your paper investment in GLD cause you to believe.

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While physical gold ownership allows you to have privacy, ease of liquidity, potential for growth and security against unstable financial institutions, GLD offers none of these things. Investing in GLD involves taking the risk of being victimized by the drastically misleading financial and accounting schemes that have infiltrated the same U.S. financial systems that you are protected from with physical gold ownership.

The Bottom Line

The transaction costs associated with gold ETFs are often lower than the costs related to the purchase, storage and insurance of physical gold. It is important to research the various costs, fees and associated expenses of each type of investment to determine the investment that is both affordable and suitable for your portfolio.

Why ETFs are better than physical gold for investment

Compulsive shoppers are queuing up outside jewellery shops in large numbers to make the most of the recent fall in gold prices. A shopper who managed to get inside a shop in Mumbai says the store resembled an overcrowded long-distance local train during peak hours.

Another shopper complained that the jeweller had taken most of the interesting pieces off the shelves, claiming that everything is sold off to ward off the crowd. Probably, he wants to wait for the prices to rise again, she says ruefully.

There are also stories doing the rounds that jewellers are refusing to buy back gold at the current price, instead insisting on a discounted price. In short, gold is making headlines, but, sadly this time, not for glorious reasons.

Precious metal won’t glitter forever

Just as gold is set to breach the Rs 25,000-mark after a splendid run that lasted more than a decade, unlike the jubilant shoppers, investors in the yellow metal are a worried lot.

For those who were sitting on profits, the tumbling was a rude awakening that the precious metal won't glitter forever. They also know that it is a 'little too late' to sell and get out.

As for those who were waiting in the wings for a price correction before investing in gold, they are a bit unnerved by the flood of obituaries for the yellow metal as a safe haven. Naturally, they want to be sure about the prospects of gold before investing in it. The only happy souls, it seems, at the moment are jewellery shoppers.

On a free fall

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The writing was on the wall for some time. The sceptics had been predicting the end of the bull run in gold, which has been almost uninterrupted for the past few years. However, most conservative investors were dismissive.

They had solid reasons: as long as there is chaos all around, gold will continue to glitter, they argued. Look around: the US is hardly out of the woods; Europe crisis shows no signs of abating; and Indian story is almost written off. While these arguments had merit, the metal has lost its sheen.

From a record high of Rs 32,500 per 10 gm in November 2012, the yellow metal has tumbled to Rs 25,680 on Wednesday. However, after the recent fall there are many voices singing in chorus about the demise of gold.

Gold prices unlikely to reverse downtrend

'The confidence in gold has been severely dented given the magnitude and the forcefulness of the recent fall. Fears of a Cyprus gold sale, liquidations in ETFs and unwinding of long positions by institutions in the international markets have contributed to the downfall,' says Kishore Narne, head, commodities, Motilal Oswal Securities.

'The prospects of any meaningful recovery in gold remain weak and given the lack of any major triggers in the near term, gold prices are unlikely to reverse the downtrend anytime soon. Short-term pullbacks are entirely possible given the speed at which prices have declined, but we anticipate another 12-15% fall from here on domestic markets before the end of FY14,' he adds.

Buy, hold or sell?

Are you about to hit the panic (or sell) button because of the collective pessimism all around you? Well, you should try to sooth the nerves and hold on to your investments for a while, say experts. 'Selling gold at these levels is not advisable at all. Hold on to your current gold investments. Remember, gold is akin to currency. In the long-term, it will move up,' says Devendra Nevgi, founder and partner, Delta Global Partners.

Even if you don't share the optimism, you have no choice but to hold on to your investments — especially if you bought gold when the prices were hovering over Rs 30,000.

'Retail investors wrongly thought that gold would help them get extraordinary returns. They should consider gold simply as part of the overall portfolio. They should not dump their investments in gold now,' adds Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories.

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Invest in gold in a piecemeal manner now

As for those waiting in the wings, many experts believe that they should consider investing in gold in a piecemeal manner now. 'Retail investors should look at meeting 30-50% of their intended investment target for the year right away,' says Nevgi. The remaining investment should be staggered over a period of a year, he adds.

However, not everyone is recommending increased purchase of gold now. 'Currently, we are not recommending additions to a client's portfolio despite weaker prices. At the moment we have a contrarian view and recommend trimming at price gains.

As inflation concerns subside, gold as a 'hedge' is likely to subside,' says Vishal Kapoor, general manager, wealth management, South Asia, Standard Chartered Bank. This apart, you should get in now only if you can stomach a lot of volatility in the short-term.

Invest through gold ETFs or demat gold

'I think gold prices are very close to the bottom now. Investors should not try to time the market and instead invest systematically through gold ETFs or demat gold on the exchanges like NSEL. This will help them average out the cost of acquisition. They should also avoid leveraged buying.

The volatility in gold prices is very high and even a movement of $40-50 could adversely affect your portfolio's value,' says Priti Gupta, director, commodities and currencies, Anand Rathi Financial Services. You could consider monthly investments to even out fluctuations.

Also, stick to your allocation. 'They should keep their total exposure to gold in the 5-7% range and not try to time the market,' says Sadagopan. Remember the basics: gold ETFs are always better than physical gold for investment purpose. Apart from better liquidity, it also eliminates the making charges and cost and risk of safe keeping. The pricing structure is also transparent. Other investment choices are gold coins and bars.

Comparison of Physical Gold Vs Gold ETF:

Gold ETF’s or gold exchange-traded funds are instruments investing in gold of 99.5% purity. Investing and maintaining these funds just required demat account and a trading account with a registered stockbroker. Gold ETFs are more ideal than physical gold due to the following reasons:

Gold ETFs are investments in gold of 99.5% purity only. It prevents one from falling into the clutches of some jewelers that fool customers with smooth and artistic talk. This avoids chances of misplacement of trust, as only a goldsmith could find out the exact purity.

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Owning something virtual like gold ETFs does away with the difficulty of storage and security hazards experienced in possessing physical gold. The units of gold ETFs can easily be stored in both demat and trading account without being known to the greedy, cheaters, robbers and looters. A word of caution here, you could be sure of it all when you keep your units in accounts with privacy of user name and password.

Gold ETFs are most ideal for small investors as they can be purchased in small denominations sometimes of even 1 gram or ½ a gram. So ETF’s can be bought easily in small installments regularly and increased in the virtual form. This advantage is not available when investing in physical gold.

Low cost, with affordability in dealing with gold ETFs contributes to their desirability over physical gold. These instruments are listed in exchanges; the exchange traded mechanism helping to reduce processing charges, disbursements and collection charges. Gold ETFs also help do away with the carry charges in gold futures.

The ease to convert gold ETFs into liquid cash easily at real time prices on the stock exchange avoiding charges like commission, and unnecessary fuss over quality and price by jewelers make them a desirable investment. This makes buying and selling these units easy.

Right and uniform pricing in Gold ETFs offered no scope for price discrimination that is experienced in encashing physical gold at the jewelers. Gold rates in Chennai and Gold rates in Mumbai may differ. It may also differ from a wholesaler to retailer. But Gold ETF in Chennai will have the same Rate as rest of India. As it is traded in the market, one lacking knowledge and experience in dealing in gold would do best to invest in good gold ETFs.

Gold ETFs offer protection from the liability of taxes. The taxation system for gold ETFs is similar to non-equity mutual funds. One only needs to pay the lower of the two, long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation on profits made.

Gold GTFs are likely to show lesser tracking errors as compared to normal funds as the creation and redemption of units are done with units of the same type. This accounts for lesser liquid cash being required and the short time interval between buying and selling of units.

However some may disagree with me and say that the psychological satisfaction of seeing and feeling physical gold in the physical form is important and gold ETFs are an intangible concept. It is purely a question of ones own perception, but I would strongly vouch for gold ETFs if investment, safety and security is ones objective.

If you keep gold in the form of ETF, you will not have any emotional attachment towards that. You will really consider it as an investment. If you need money for buying a property or kid’s higher education you will feel free to encash it. But in the case of physical gold, we will not be prepared to sell it because we will have emotional attachment towards physical gold.

So, Gold ETFs are the better way to invest in gold. Still you feel that you need physical gold? There are some occasions like daughter’s marriage where you must need gold in physical form.

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How are ETFs Different from Mutual Funds?

You are interested in exchange-traded funds, but you'd like to learn how to use them properly. This article examines the characteristics that set exchange-traded funds apart from mutual funds.

Investors have probably heard of exchange-traded funds (ETFs), but they may not understand how ETFs work or what benefits or drawbacks they may have over mutual funds. Such information can lead to more intelligent and balanced investment decisions. This article provides an overview of how ETFs are structured, managed, bought, and sold. Along the way we point out the key areas in which ETFs differ from mutual funds -- e.g., how and when they can be traded, operating expenses, and potential tax treatment. We round out the article with a simple comparison chart that highlights the main features.

Key Points

You've probably heard of exchange-traded funds (ETFs), but you may not have a clear idea of how they work, how they differ from mutual funds, or how they might fit in your investment portfolio. Here's your chance to take a closer look at ETFs and examine the characteristics they share with mutual funds as well as those that set them apart.

Mutual Funds that Trade like Stocks

Although ETFs and mutual funds both register with the SEC as investment companies, they are structured and operate quite differently.

Mutual funds pool investors' money to purchase a portfolio of securities. Each investor owns shares, which represent a portion of the holdings of the fund. Shareholders buy and sell shares based on the fund's NAV -- net asset value -- which is calculated daily and fluctuates as fund holdings and shares outstanding change. Some mutual fund shares can be purchased from fund companies directly, while others are sold through brokers, banks, financial planners, or insurance agents. If you purchase mutual fund shares through a third party, there is a good chance you will pay a sales commission, or load.

When describing ETFs, it may help to think of them as mutual funds that trade like single stocks. ETF shares are created when an institutional investor or "authorized participant" deposits a specified block of securities with the fund. This "basket" of stocks reflects the composition of an index, such as the S&P 500 or the Nasdaq 100. Individual investors can buy and sell ETF shares only after they are listed on an exchange such as the New York Stock Exchange (NYSE). Unlike mutual funds that must be purchased or sold at their end-of-day NAV, ETFs can

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be bought and sold in real time at prices that change throughout the day. Although ETFs still calculate an end-of-day NAV, intraday prices are based on investor demand. ETFs can thus be used for certain hedging strategies typically associated with stocks, such as buying on margin and selling short.

Comparing Costs

One of the key selling points of exchange-traded funds is cost. ETF expense ratios are generally lower than no-load index mutual funds and are significantly lower than actively managed mutual funds.1 For instance, the average expense ratio is 0.60% for ETFs, 0.75% for index funds, and 1.24% for actively managed funds.2

These cost savings can be significant, especially for long-term investors. Although ETF investors will pay a brokerage commission on a per-trade basis to buy or sell shares, the savings from lower expenses can help offset these transaction costs.

Tax Consequences

One major tax advantage that sets ETFs apart from mutual funds is that ETF shareholders are not affected by the trading activity of fellow investors. For instance, mutual fund managers may be forced to sell portfolio holdings to meet the redemption demands of certain fund investors, resulting in an unexpected capital gain or loss to all shareholders. With ETFs, since trading takes place on an exchange between investors, the fund doesn't need to sell stock to meet redemptions, thereby avoiding unforeseen tax events. In addition, the generally low portfolio turnover rate of ETFs contributes to their lower operating costs.

It should be noted that mutual funds and ETFs are required to make annual capital gains distributions to investors, which may be caused by index rebalancing. But as noted above, for ETF investors capital gains distributions are never caused by redemptions in the fund.

Fund Transparency

Today, investors are increasingly demanding more transparency with regard to fees, portfolio holdings, and other operational features. By design, ETFs and index mutual funds deliver greater transparency than actively managed mutual funds because their composition and performance are tied directly to the indexes they mimic. Individuals can easily gauge the performance of their investment by referring to the index it follows. By comparison, the holdings in actively managed funds are subject to change and are less easy to monitor.

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Balancing Act

Perhaps the biggest concern for investors with regard to ETFs is derived from one of their greatest attractions. ETFs are so easily bought and sold through a broker or by accessing an online trading account that investors could be tempted to trade too frequently and eliminate any tax or cost advantages due to transaction costs. Therefore, as with any other investment, ETFs should be considered carefully and used only as part of a tailored investment strategy.

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Attribute Exchange-Traded Fund Mutual Fund

TradingBuy or sell on an exchange at "real-time" prices throughout the day.

Buy or sell once a day atthe closing net asset value.

Can be bought on margin/sold short.

Yes

No

Purchase/saleBuy through brokers or online trading account.

Buy direct from fund company, through a third-party (broker, bank, financial advisor), or fund supermarket.

Expenses Expense ratio is generally lower than index or actively managed mutual funds; brokerage commissions are charged on a per-transaction basis.

May be subject to front-end or back-end sales loads and annual management expenses, including 12b-1 fees; however, some funds may not charge a sales load.

Tax consequences Same as for individual stocks.Same as for individual stocks; may force unwanted capital gains distribution due to trading activity of other fund shareholders.

Points to Remember

Exchange-traded funds and mutual funds both register with the SEC as investment companies, but they are structured and operate quite differently.

ETFs are often described as mutual funds that trade like single stocks.

Unlike mutual funds that are purchased or sold only at the end of the trading day at their closing NAV, ETFs are bought and sold on an exchange throughout the day at "real-time" prices.

ETFs can be used for certain hedging strategies typically associated with stocks, such as buying on margin and selling short.

ETF expense ratios are generally lower than no-load index mutual funds and are significantly lower than actively managed mutual funds.

Unlike mutual funds, ETF transactions do involve brokerage commissions.

How ETFs and mutual funds are the same

Less risk through more diversification

One ETF or mutual fund can invest in hundreds (sometimes thousands) of stocks or bonds in a single fund.

Professional management

You don't have to keep track of every security your fund owns. The fund is managed by experts who take care of that for you.

How ETFs and mutual funds are different

Buying & selling

ETFS

You can only buy and sell ETFs through a brokerage account.

MUTUAL FUNDS

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You can buy and sell mutual funds through your Vanguard mutual fund account.

Trading & pricing

ETFS

You can trade ETFs on the major stock exchanges anytime during the trading day. Their prices will fluctuate throughout the day just like stocks.

MUTUAL FUNDS

Mutual fund shares are priced once a day after the markets close.

Transaction costs

ETFS

You won't pay any commissions to trade Vanguard ETFs in a Vanguard Brokerage Account.

There's an unavoidable cost when trading individual stocks, bonds, and ETFs known as the bid-ask spread.

MUTUAL FUNDS

In most circumstances, there are no transaction costs when you buy and sell your mutual fund shares at Vanguard.

Automatic investing

ETFS

There's no automatic investment option for

ETFs.

MUTUAL FUND

Invest your savings on a regular schedule by moving money directly from your bank account into your Vanguard accounts or set up automatic transfers from one Vanguard fund to another.

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How ETFs work

An exchange-traded fund (ETF), like a mutual fund, is a type of investment fund. An investment fund is a collection of investments, such as stocks, bonds and other funds. Like a stock, an ETF is traded throughout the day on a stock exchange.

3 main types of ETFs

1. Index ETFs

Index ETFs are the most common type of ETF. They hold the same mix of investments as a stock or bond market index. In this way, they mirror, or passively track, the performance of the index. For example, an index ETF may track:

a broad-based index, such as the S&P/TSX Composite Index,

a specific sector, such as health care or infrastructure,

a commodity, such as gold or oil, or

a currency.

If the index or sector that the index ETF tracks does well, so does the ETF. If the index drops, the price of the ETF will also drop. Index ETFs tend to have lower management expense ratios (MERs) than mutual funds.

2. Actively managed ETFs

These ETFs have a portfolio manager who is making investment decisions on what to buy and sell, and when. They usually aim to outperform, rather than passively track, a particular index. These ETFs tend to have higher fees than index ETFs.

3. Leveraged ETFs

These ETFs use leverage (or borrowing) to increase returns. This can be very risky.

Learn more about different types of ETFs and how they work.

Buying and selling ETFs

You buy ETFs in units or shares from an investment firm. Here’s how it works:

You can buy or sell ETFs any time the stock market is open. ETFs are traded throughout the day at the current market price.

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ETFs have ticker symbols, just like stocks.

There is no minimum investment amount.

The price is closely tied to the ETF’s net asset value (NAV) or the total value of all securities held by the fund.

As the value of the ETF’s assets fluctuates, so does the price of the ETF.

Learn more about trading ETFs.

Understanding distributions

Some ETFs pay out the money the ETF makes to investors. These payments are called distributions. For example, you may receive:

interest distributions if the ETF invests in bonds,dividend distributions if the ETF invests in stocks that pay dividends, orcapital gains distributions if the ETF sells an investment for more than it paid.

Unlike many mutual funds, ETFs do not reinvest your cash distributions in more units or shares. Instead, 1 of 2 things will happen:

The cash will gather in your account until you tell your investment firm how you want to invest it. You may have to pay a sales commission on what you buy.

Your investment firm may offer a program to automatically buy more ETF units or shares for you. You likely won't pay a sales commission on these automatic purchases.

How ETFs are taxed

You'll pay tax on:

any capital gains you make from an ETF when you sell it, andany distributions you receive from the ETF.

If you hold an ETF inside a tax-sheltered account such as an RRSP or a RRIF, you won’t pay tax on what you make investing until you take the money out. With a TFSA, you won’t pay any tax on the money you make while it’s in plan or when you take it out. Learn more about how investments are taxed.

Index ETFs are considered to be relatively tax efficient investment funds. This is because index ETFs tend to have less portfolio turnover, which reduces potential taxable capital gains that would be passed on to investors.

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BACKGROUND

Brief Introduction

What is gold?

Gold is a comparatively dense, shiny, yellow metall. As an element, gold is quite resistant to corrosion (by oxygen, but also many other chemicals). There are medical (dentistry), chemical and industrial applications of gold. However, aside these rather limited applications (for which, in fact, gold often can be substituted with other materials like copper, ceramics etc.) the metal is more or less useless.

Why is it expensive?

Despite its relative uselessness, it is wellknown that gold is comparatively expensive (e.g. when compared with the same amount of iron or copper). So, why (at least over the last couple of thousand years) has humanity perceived gold as one of the most expensive materials on the planet? The reasons are in fact very simple: gold is rare, gold cannot be created (synthesized under economic costs) and, as mentioned before, it is shiny and does not oxidize. The latter property made gold an ideal material for jewellery and other representative uses. The evergrowing demand for jewellery and the rareness of gold hence determined its price. In return, the high price made gold an ideal store of wealth. In today's prices (Feb 07, 2007), one kilogramm (around two pounds) of gold is worth around EUR 16,000 (equivalent to GBP 10,600 or USD 21,000). One kilogramm of gold would have the volume of a small bar of chocolate and could easily be stored under your pillow or on the ground of the fish pond in your garden (no packaging required).

Why is gold more than just another precious metal?

As gold was perceived as an ideal store of wealth, its importance as a medium of exchange in trade grew. Finally, this lead to the invention of gold currencies. However, instead of exchanging real gold coins, it would be enough to only exchange the right on or the promise of a certain amount of gold. Paper money was born. As a relict of the times when currencies were backed by gold, many financial institutions (central banks, the IMF etc.) hoard large quantities (several thousands of metric tons) of gold until today. Up until 1971, the US-Dollar was one of these gold backed currencies. Since many other countries linked their own currencies to the Dollar by more or less fix exchange rates, gold was de-facto the world currency.

EXCHANGE-TRADED FUNDS

Exchange-traded funds (ETFs) can be a valuable component for any investor's portfolio, from the most sophisticated institutional money managers to a inovice investor who is just getting

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started. Some investors use ETFs as the sole focus of their portfolios, and are able to build a well-diversified portfolio with just a few ETFs. Others use ETFs to complement their existing portfolios, and rely on ETFs to implement sophisticated investment strategies. But, as with any other investment vehicle, in order to truly benefit from ETFs, investors have to understand and use them appropriately.

Understanding most ETFs is very straightforward. An ETF trades like a stock on a stock exchange and looks like a mutual fund. Its performance tracks an underlying index, which the ETF is designed to replicate. The difference in structure between ETFs and mutual funds explains part of different investing characteristics. The other differences are explained by the type of management style. Because ETFs are designed to track an index, they are considered passively managed; most mutual funds are considered actively managed. (For more insight, read Mutual Fund Or ETF: Which Is Right For You? and Active Vs. Passive Investing In ETFs.) From an investor's perspective, an investment in an index mutual fund and an ETF that tracks the same index would be equivalent investments. For example, the performance of the SPDR S&P 500 ETF and a low-cost index fund based on the S&P 500 would both be very close to the to the S&P 500 index in terms of performance.

Although index mutual funds are available to cover most of the major indexes, ETFs cover a broader range of indexes, providing more investing options to the ETF investor than the index mutual fund investor.

CASE STUDYGOLD INVESTMENT

Background

James Redgrave approaches his Financial Adviser about investing in gold as he has seen that this is rising in value and believes it to be a good investment. His Financial Adviser discusses the risks with him, including some reports that suggest the value may drop and that it can be a volatile asset class. James decides he still wants to invest and is interested in using his Hornbuckle SIPP to do so.

The Financial Adviser is not sure whether direct investment in gold is permitted via SIPP as it is tangible moveable property which he understands can be taxable.

Solution

James’ Financial Adviser speaks to his local Trustee Consultant about investing in gold. The Trustee Consultant explains that although gold is tangible moveable property there is a specific exemption for investment grade gold bullion that means it is not classed as taxable property. To qualify the gold must be of a purity not less than 995 thousandths and in the form of a bar or wafer and of a weight accepted by the bullion markets.

The most straightforward way to invest is via direct gold investment service providers that are geared for SIPP investments. They offer online trading facilities, have arrangements for gold

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storage and have controls such that disinvestment can only be made back to the pension scheme bank account. They have identifiable terms of business that leaves no question as to what service should be expected by the investor.

James and his Financial Adviser look at a few such providers, complete due diligence checks, and inform us which one they wish to use. We then set up an online account that James can control as it is structured so that it can only invest in gold bullion and hold cash. Any disinvestments from the account can only be made to the SIPP bank account.

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CONCLUSIONGOLDToday's investor has more choices than at any other time in history. Unfortunately, far too many have learned the hard way that diversifying their portfolios only with more paper assets provides no security against adverse financial conditions.

The peril of paper assets.

A vicious cycle begins whenever there is a sharp decline in available cash. Less cash curtails spending and companies compensate for reduced revenues by eliminating jobs - cutting spending even further. The Government tries to stimulate the economy by printing more currency, but without the backing of hard assets the increased supply decreases the currency’s value. The weaker currency drags all cash-based assets – such as stocks, bonds, annuities, and money market instruments - down with it

Gold Investment Info

Interestingly, no real value is lost – only prices decline. Stocks, for example, still represent the same proportionate ownership of the same company’s physical capital. However, the market value of stocks is set by the prevailing sense of the company’s overall health, an arbitrary evaluation that is tightly linked to the value of currency.

How gold can help you weather the storm.

The value of physical gold, on the other hand, is not tied to any government or corporation and therefore does not bear the risk of devaluation associated with paper assets. Instead, gold’s value is determined by global supply and demand. Existing “above ground” stocks of gold were about 158,000 tons in 2006 while mining added only 2,239 tons. That, along with international agreements, have created a very stable supply. If demand were to remain constant, then the value of gold would remain constant while the price of gold would rise to exactly counter the decline in the value of currency.

However, global demand is steadily increasing with the emergence of powerful new economies. And, because of gold’s stabilizing effect, investors are converting more and more soft assets into gold. Due to recent sharp increases, gold investment now accounts for over 20% of total

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demand. When growth in demand exceeds growth in supply, the actual value of gold increases accordingly.

So why not put all of my money into gold?

Remember the goal is to achieve balance in your investments. Just as gold hedges against adverse movement in the value of paper investments, the opposite can also be true. Too much of a good thing could put a damper on the long term growth of your total portfolio. And in the short term, especially in times of economic panic, gold is susceptible to wild speculation.

Take control over your financial future.

The problems facing the world today are not going to disappear overnight. In this uncertain era of globalization and increasing natural calamities it is imperative that we all be proactive to protect our wealth and secure a future for our families. For those who have experienced severe losses in their investments it is even more critical to take action now. It is never too late.

No investment is a sure thing, and no single investment strategy is right for everyone. However, experts agree it is wise to include gold investments in every portfolio as a hedge against inflation and declining value in mainstream investments.

Trade in your worries for some peace of mind.

Take the first step towards your financial security today by calling 1-800-300-0715 and speaking with one of our friendly expert gold investment advisors. parent company gold-investment.info understands that the ideal investment strategy for you depends upon your unique goals, dreams, and resources. Our singular mission is to assist you in planning a gold investment strategy that is right for you, your family – and your future.

ETFAlthough the first exchange-traded funds (ETFs) were designed to track broad market stock indexes, since that time, ETFs have been developed to track industrial sectors, investment styles, fixed income, global investments, commodities and currencies. ETFs are now available to replicate just about any index available.

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make the ETF profitable.

An ETF trades like a stock on a stock exchange. However, like a mutual fund, the ETF has a structure that pools the assets of its investors and uses professional money managers to invest the money. Unlike most mutual funds, which are actively managed, most ETFs are passively managed. An ETF most resembles an index fund that tracks the same index and its performance should closely mirror the index it tracks.

An investor who wants to buy ETFs has a myriad of options to choose from in equities, foreign stocks, fixed income and alternative investment. There are also many different strategies the investor can employ when using ETFs. Like other investments, it is important for the investor to evaluate the different options to ensure the right ETF is chosen for the job.

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RECOMMENDATIONS

FINDINGS:

a) Gold price appreciation makes up for lost interest, specially in a bull market.

b) Central Banks in several countries have stated their intent to increase their

goldholdings instead of selling.

c) All gold funds are in a long term up trend with bullion, most recently setting new all-

time highs.

d) The trend of commodity prices to increase is relative to gold price increases.

e) Worldwide Gold production is not matching consumption. The price will go up

withdemand.

f) Most Gold consumption is done in India &also its demand is increasing with their

increase in national wealth.

g) Exchange-Traded Fund (ETF), is a security that tracks an index, a commodity or

abasket of assets like an index fund, but trades like a stock on an exchange,

thusexperiencing price changes throughout the day as it is bought and sold

h) ETFs represent shares of ownership of a unit investment trust (UIT), which

holdsportfolios of stocks, bonds, currencies or commodities.

i) ETFs are security certificates that state the legal right of ownership over a portion of

a basket of individual stock certificates.

j) More simpler definition :ETFs are essentially mutual fund schemes or index

fundsthat are listed and traded on the exchange like stocks.

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BIBLIOGRAPHY

News Paper:

Economic times - By Preeti Kulkarni, ET Bereau Business today

Books:

Investment Management -By Raghu Palat

Web Sites:

www.investopedia.com www.wikipedia.com

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