When you invest in a gold ETF you invest in gold. The difference is, you avoid the hassle of actually buying and storing the gold yourself. To many this would just be too difficult and costly. Though to some, not actually owning and possessing the gold might be a downside.
Some ETF gold funds don’t actually buy gold either, instead they use various financial instruments, such as futures contracts or stocks, to track the gold price. Using these instruments will not track the price to the same degree of accuracy as buying gold bullion however it offers other benefits, such as lower expenses and increased flexibility.
Why Invest in Gold?
Since investing in a gold ETF fund is similar to investing in gold, the next question should be: “Why invest in gold?” In times of economic turmoil gold is often considered an attractive investment object, because it is relatively safe.
The current economic crisis has spurred governments around the world to heavily expand their spending. This is done in the hopes of stimulating consumption, thereby stimulating demand for goods which hopefully will create economic growth. One downside to fiscal expansions tends to be inflation.
Investing in gold is a classic hedge against this inflation. The real purchasing power of gold usually remains stable, while the purchasing power of the dollar will obviously plummet in times of high inflation. Thus, gold as an investment object makes sense if you expect inflation to rise in the coming years.
Diversify Your Portfolio
In general, you want to diversify your portfolio of investments. You want to hold some high risk, high reward assets, such as penny stocks, and some relatively safe assets, such as bonds and shares of a gold ETF. This will produce a healthy yield, while minimizing your exposure to risk.
To diversify your portfolio is a classic piece of advice, but advice that will never become obsolete.