With the advent of Exchange traded funds its now easier then ever to get exposure to all sorts of commodities or even the producers of those commodities. One hot topic commodity this year is gold. Today we take a detailed look at the ETF's in the gold space, weather you want to participate in physical gold or the companies that produce it.
The SPDR Gold shares ETF
Just as we can get physical gold exposure in our portfolio, there are also ETF's that allow you to purchase a basket of companies that are involved in the exploration, development, and delivery of physical gold. Now when we invest in physical gold, the process is simple to understand. Basically, if gold goes up, then you make money. If it falls, you lose money. But, an investment in a gold mining ETF can get a little more complicated.
Remember that we said the gold mining ETF's were going to purchase a basket of mining stocks. This can be good or bad for the ETF. If the market tanks its likely that some or all of the gold mining companies would fall, even if gold prices head higher. Now there are also times in history where we could say that the opposite is true.
But, lets not make things too complicated. In general, the correlation between gold miners and the price of gold is historically quite high. As of now the correlation of the Gold mining ETF
Another important difference between the Gold ETF's and Gold mining ETF's is profitability. The overall profitability of the basket of gold miners is going to vary quite a bit. The management team can have a great impact on the profitability of a gold mining company. Sometimes gold mining companies choose to hedge by locking in a fixed price for the gold they produce which means they could miss out on further rising prices.
Ok, so with all this in mind you can clearly see that there are some considerations when looking into gold mining ETF's versus pure gold ETF's. Now today we just compared gold, but the same analysis that we applied here can be applied on all commodity and commodity related companies. Oil for example also has some great ETF's for the pure play, along with the basket of producers.