Is It a Good Time to Buy Gold ETFs?

What Is a Gold ETF & Is It a Good Time to Buy?


Written by John Rothans

Mar 31, 2021

A gold ETF (exchange-traded fund) is a commodity ETF that consists of only one principal asset: gold. But if you have a gold ETF, do you really own any gold? In this crash course on gold ETFs, you’ll learn what gold ETFs are, how they’re bought and sold, and how their role can differ from the role of physical gold in your portfolio.

How do gold ETFs work?

Gold ETFs trade on stock exchanges, just like shares of stock and mutual funds do. Owning shares in a gold ETF enables someone to gain partial exposure to the performance of the spot price of gold.

However, a gold ETF does not mean you directly own physical gold. The ETF represents a paper claim on the commodity and not the actual commodity itself. In reality, the ETF company actually holds the physical gold. As Investopedia notes, an ETF is typically set up as a trust and within the trust is gold bars. There is a specific number of gold bars allocated to each share of the ETF issued. So when you buy a gold ETF, you’re buying a portion of the gold that’s held by the trust.

Make sure you read the gold ETF prospectus or description, though. Some ETFs hold gold, “while others follow a gold index or a group of companies involved in gold acquisition or mining operations,” Retirement Living explains.

The first gold ETF in the U.S. debuted in 2004.

What affects the price of gold ETF shares?

Several factors could affect the price of gold ETF shares. Among them:

  • A market sell-off of physical gold during a crisis could bring down the price of ETF shares.
  • A substantial sell-off of physical gold by central banks and other major holders of the yellow metal could impact the price of ETF shares.
  • A big sell-off of one company’s gold ETF shares could negatively impact other gold ETFs.
  • Fluctuations in gold supply and demand, interest rates, currency exchange rates, and inflation rates could influence the price of gold and, therefore, the price of a gold ETF share.

How does a gold ETF and physical gold compare?

There are three important differences to consider when comparing a gold ETF and physical gold.

  • With a gold ETF, you own an asset on paper. With physical gold, you own an entirely tangible asset that you can hold in your hand and lock away in a safe.
  • Gold ETFs and the gold associated with them cannot be sold outside a formal financial structure, while physical gold can.
  • A gold ETF may charge management fees and may carry additional long-term tax implications.

For advanced market watchers, here’s another matter to consider regarding gold ETFs.

When massive amounts of gold ETFs are bought on the open market, this can put upward pressure on the price. When large quantities are sold, this can cause a decrease in gold’s price. This effect becomes more pronounced the more volatile a market becomes.

Under ordinary circumstances with mid-volume trading, ETFs typically have a limited effect on gold prices. In higher-volatility circumstances, though, it’s possible for ETF buying and selling to have a noticeable impact on gold prices.

For example, in early 2020, people “cashed out of gold positions” to make up for losses elsewhere. While this put some downward pressure on the price of gold, gold was still able to perform its strategic function as a liquid asset to “meet margin calls…amid sharp declines across equity markets,” Kitco notes.

Should you consider buying gold ETFs or physical gold?

So should you buy shares in a gold ETF or buy physical gold? Well, that choice is up to you.

However, it’s worth noting that gold ETFs typically don’t offer as much portfolio diversification as physical gold does. Gold stocks “do not provide the same downside capture or diversification as physical gold itself,” according to U.S. News & World Report.

Perhaps the biggest difference between gold ETFs and physical gold is that you “never have any actual gold in your possession,” Retirement Living adds. Sure, you “own physical gold through the type of gold ETF that purchases it directly, but you can’t go knocking on someone’s door to claim it.”

Ready to learn more about physical gold? Call U.S. Money Reserve with more questions about precious metals. We can help you choose the right amount and type of physical gold that fits your needs.


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