5 Things to Consider Before You Buy That Gold ETF | ETF Trends

Ongoing concerns about the direction of both the U.S. and global economies has once again thrust gold exchange traded funds (ETFs) into the spotlight. But before you take on this popular save-haven tool, there are five things you should know.

Gold has a lot of appeal in a lot of different circumstances. Several things are driving the price to new records today:

  • The threat of inflation…eventually. Today’s employment numbers weren’t very good and the crisis in Europe is hanging like a cloud over the U.S. stock market. That aside, although it’s not that great right now, the economy is getting better. As it improves, rates will rise and we could very well see inflation. [Why Gold is Surging.]
  • Safe haven. We just can’t seem to put the Greece situation to bed, and it’s sparking fears of a contagion effect if it isn’t dealt with soon. The dollar is up, commodity prices are falling and, in general, investors are moving toward quality right now.

Before you run out and buy, however, Ben Baden for U.S. News & World Report reports that there are major things to consider before adding some bling to your investments.

  • It has never been easier to invest in gold: The ease and liquidity of ETFs have really opened up commodities in general as a new asset class for investors. ETFs have made commodities like gold accessible to all investors, big and small. In the past, for investors to buy gold, they either had to buy coins or bullion. ETFs have expanded those options to include bullion, futures and equities.
  • Gold can diversify: Gold often moves differently than the broader markets, which can help offset losses in stocks during sell-offs. Gold can also limit the volatility in your portfolio because it’s a non-correlating asset. [Gold and Silver ETFs Have Appeal.]
  • Gold as a reserve currency: The market’s behavior is partly due to worries that debt problems in some European countries like Greece could spread to other parts of the European Union and damage the euro. The dollar has rallied in response, but the United States has debt problems of its own. Gold is a stand-by, and tends to hold its value even as other currencies lose it.
  • It has been a good, long run: Some investors who are new to commodities may not know what they’re getting into. Gold reached new highs last week, and may be reaching its peak price, so buyer beware.
  • Gold can be volatile: Gold can provide diversification, but investors should be aware of the risks of investing in commodities. Don’t place all of your bets on gold, maybe just 3%-5% if you want it for a hedge. Gold can be a volatile and valuable asset at the same time.

There are three ETF types you can use to invest in gold: futures, bullion-backed and equities. Learn the differences here. Tax implications and performance are different for each fund type.

  • SPDR Gold Shares (NYSEArca: GLD): bullion-backed
  • ETFS Gold Trust (NYSEArca: SGOL): bullion-backed
  • iShares COMEX Gold (NYSEArca: IAU): bullion-backed
  • PowerShares DB Gold Fund (NYSEArca: DGL): futures
  • Market Vectors Gold Miners (NYSEArca: GDX): equities
  • Market Vectors Junior Gold Miners (NYSEArca: GDXJ): equities

For more stories about gold, visit our gold category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.