Gold ETFs, Explained

Gold ETFs, Explained

Because all that glitters is gold, it's no surprise that it's the gold investor's hedge fund against economic and market uncertainty. Gold's price has historically risen during some of the most severe market crashes, making it a safe haven. This is due to the precious metal's inverse relationship with the stock market.

Another reason for gold's popularity is the metal's physical supply versus demand, which outweighs the world's reserves. According to the World Gold Council, bringing new mines into production and discovering new gold deposits takes a long time.

But if you can’t afford to invest in the actual commodity and want an alternative to physical gold, you have other options: These include gold exchange-traded funds (ETFs)

Gold ETFs, definition

A gold ETF, or exchange-traded fund, is a commodity ETF that only retains one asset: gold. Exchange-traded funds behave similarly to individual stocks and trade on the same exchange. Gold ETFs are a dematerialized alternative to physical gold. Because one unit of gold ETF is equivalent to one gram of gold, the minimum investment is one gram of gold.

Purchasing gold ETFs entails purchasing gold in electronic form. Gold ETFs can be bought and sold in the same way that stocks can. When you redeem the gold ETF, you receive the cash equivalent rather than physical gold. This means that the fund owns gold derivative contracts backed by gold. As a result, if you invest in a gold ETF, you will not own any gold.

In a nutshell, gold ETFs are units that represent physical gold, which can be paper or dematerialized. Gold ETFs are said to combine the flexibility of stock investing with the ease of gold investing.

Gold ETFs Purchases

ETF shares can be purchased just like any other stock—through a dematerialised account (Demat), brokerage firm, or a fund manager, which makes it merely an electronic investment in gold.

Furthermore , there are some aspects of ETFs to consider. If you want to own gold, you can't do so with a gold ETF. You will never have a gold bar, bullion, or coins in your possession. Gold ETFs are composed of gold contracts and derivatives, and they can be redeemed only for cash, never for gold.

Finally, there are also fees associated with ETFs. Because gold generates no income and there are still expenses to be paid, the ETF's management is permitted to sell gold to cover these costs. Each sale of gold by the trust is a taxable event for shareholders. This means that a fund's management fee, as well as any sponsor or marketing fees, must be paid by liquidating assets.

Furthermore there’s also the fees associated with ETFs. Because the gold itself produces no income and there are still expenses that must be covered, the ETF's management is allowed to sell gold to cover these expenses. Each sale of gold by the trust is a taxable event to shareholders. That means that a fund's management fee, along with any sponsor or marketing fees, must be paid by liquidating assets.

This reduces the overall underlying assets per share, leaving investors with a representative share value of less than one-tenth of an ounce of gold over time. This can result in discrepancies between the underlying gold asset's actual value and the ETF's listed value.

The Minted Bottom Line.

If you like to try the thrill of owning physical gold, gold ETFs are not for you.

Investors looking to enjoy the touch, feel, and security of owning gold may wish to buy gold bars instead of intangible investments such as gold exchange-traded funds (ETFs).

At Minted, physical gold bars can be purchased at spot price, through our fully flexible monthly plans that start from just £30. The equivalent of £1 a day, less than a cup of coffee. You can also top-up your purchases of precious metals whenever you like. Download the Minted App now and start building with us, because financial freedom is the best thing money can buy.