Gold ETFs Are Hot Now, But Know the Risks, Too

March 31, 2008 at 12:00 pm by Tom Lydon

As it continually hits new records, it’s no secret that gold and related exchange traded funds (ETFs) are the trend right now. Many stories on the subject mention the metal’s allure as a "safe haven" in shaky markets, but not everyone agrees.

John Handbury for The Market Oracle is a voice of dissent. He contends that investors aren’t buying it for safety - they’re buying it to make a profit. The metal is subject to the same principles of supply and demand like other commodities, but the supply side differs greatly from oil.

There is enough gold to last thousands of years. There’s no cartel that metes gold to the markets to maintain prices. And gold doesn’t often get used up; it merely waits around until it’s resold.

Handbury says that eventually gold prices will begin to fall and the hoarding that’s taking place now will reverse itself. Those who are bullish on gold will stand by as the price falls to $900, then $800 and perhaps $700, until they realize the fortune is not to be had this time around.

We say: not if you’re smart. Setting a stop loss and bailing when a holding falls 8% off its high or dips below its 200-day moving average. Holding on as something falls and thinking that it will turn around is a mistake many investors make - don’t fall into that trap.

History has shown that gold is no guarantee of wealth, and that it is unlike any other asset class.

There are several gold ETFs available: streetTRACKS Gold Shares (GLD) and iShares COMEX Gold Trust (IAU) hold gold futures, while Market Vectors Gold Miners (GDX) holds mining companies.