In the late 1960s, bands like Led Zeppelin and Black Sabbath spawned an early generation of metal heads and in times of heavy market volatility, metal is also highly sought after. This was certainly the case during the month of August and with possibly more head-banging volatility to come in October, investors could be looking to add more metal in their portfolios.
Investors who aren’t sure where to start could look the most popular precious metal, which is gold. Commodities like precious metals offer investors an alternative to divest their holdings. Often times, commodities march to the beat of their own drum compared to the broad market.
Because of this negative correlation, large downturns in the broad market may not affect commodities. Investors can participate in the commodities market by trading the actual commodity or their futures contracts. An easier way for investors to participate in commodities is through a commodity exchange-traded fund (ETF). Investing through an ETF will allow investors to reap benefits, such as tax efficiency.
An investor in a commodity ETF does not typically own the actual commodity itself. Instead, an investor can own the contracts backed by the commodity. The performance of the commodity will determine the value of the contract at the time it is bought and sold. ETFs investing in commodities typically use leverage, which is borrowed capital.
Examples of ETFs that use leverage in precious metals include the VelocityShares 3x Long Gold ETN Linked to the S&P GSCI Gold Index ER (NasdaqGM: UGLD). For the opposite direction, there’s the VelocityShares 3x Inverse Gold ETN Linked to the S&P GSCI Gold Index ER (NasdaqGM: DGLD).
With all the focus on gold, can it continue to rally through the rest of the year?
“Gold prices have leapt nearly 18% this year to exceed US$1,500 an ounce, the highest level in over six years, raising questions as to whether the precious metal’s hot streak is nearly over,” wrote the Bangkok post. “Many investment firms remain bullish on gold, and they are betting that the price has scope to reach $1,600 in the foreseeable future as investors seek a refuge in safe-haven bullion to hedge against global economic doldrums and wild market swings.”
Here have been the best performers in precious metals so far this year:
For more market trends, visit ETF Trends.