Henry David Thoreau once wrote, “A grain of gold will gild a great surface, but not so much as a grain of wisdom.” Granted, if the 19th century transcendentalist and tax protester found a grain of gold, he’d likely have skipped it across Walden Pond — after first decrying it as the Devil’s lucre. But the wisdom still holds true for modern-day investors looking to hedge against looming economic thunderheads.
Precious metals always have a place in a well-diversified portfolio, but there are several reasons to look at gold exchange-traded products right now.
Thanks to a late-summer run, gold prices surged past $1,700; despite a recent fallback, gold remains above that bar. Worries about the fiscal cliff and eurozone recession — as well as the Federal Reserve’s vow to keep interest rates low until at least 2014 — could help bolster it further.
Sure, global gold demand lower than it was a year ago, but central banks still are buying the metal at the fastest pace since 1964.
We’d all like to be able to buy and store physical gold like hedge fund guru Dan Tapiero does here, but most of us frankly don’t have the money. Most regular investors would be better off with an exchange-traded product, which has a lower buy-in, trades like a stock and has lower fees than most mutual funds.
Here’s where Thoreau’s grain of wisdom comes in: Physical gold tends to rise on inflation, but mining stocks like Barrick Gold (NYSE:ABX), Goldcorp (NYSE:GG) and Newmont Mining (NYSE:NEM) can slump like other equities. That’s why I’d hold off on major mining ETFs like Market Vectors Gold Miners ETF (NYSE:GDX), Global X Pure Gold Miners ETF (NYSE:GGGG) for now.
Instead, here are four ETP trading ideas that allow you to go for the gold in a number of ways. But be careful — while all are viable, some are riskier than others.
Long Play: SPDR Gold Shares
YTD Performance: +9.1%
Assets Under Management: $69 billion
Expense Ratio: 0.4%
SPDR Gold Shares (NYSE:GLD) is the simplest way to play optimism on a future rise in gold prices. GLD holds physical gold bullion — each share represents 1/10th of an ounce of gold, so when gold goes up, GLD does, too (the ETF currently trades around $165 per unit).
GLD is a monster ETF in both size ($69 billion in assets) and volume (nearly 10 million shares traded daily), so investors should have no concerns about liquidity here. And best of all, its cheap expense ratio is a far more practical option than securing and insuring a stack of gold bricks in your basement.
‘Taxmageddon’ Play: E-TRACS UBS Bloomberg CMCI Gold ETN
YTD Performance: +8.9%
Assets Under Management: $18 million
Expense Ratio: 0.3%
The E-TRACS UBS Bloomberg CMCI Gold ETN (NYSE:UBG) is a bit more complex ETP than the SPDR Gold Shares. UBG is an exchange-traded note that invests in gold futures contracts instead of physical gold.
One of UBG’s primary benefits is on the tax side. Physical gold ETF shares are taxed as collectibles — currently at a 28% rate if you hold GLD for a year; however, UBG is taxed at the 15% long-term capital gains rate. Even if the capital gains rate hits 20%, the ETN still should yield tax benefits.
However, contango is a concern with futures-based ETNs like UBG because the spot price of a commodity can be lower than the futures contract price at the time of expiration. You need to weigh that risk and monitor UBG’s performance closely.
Volatility Play: Global X Gold Explorers ETF
YTD Performance: -27.9%
Assets Under Management: $41 million
Expense Ratio: 0.65%
Global X Gold Explorers ETF (NYSE:GLDX) is about as much of a niche play as you can find in precious metals: GLDX’s holdings consist primarily of small-cap, Canadian and U.S. gold exploration firms like Newstrike Capital, Sabina Gold & Silver and Rubicon Minerals (AMEX:RBY).
So why consider GLDX? Because if gold prices manage to hold or even increase their altitude over time, rising demand will boost exploration. These smaller, more focused companies stand to move further and faster than larger mining conglomerates. And many companies are striking gold now: For instance, Newstrike has found rich concentrations of high-grade gold in its Ana Paula project in Mexico.
The risk is higher with GLDX — the fund has plummeted this year thanks to currency fluctuations and flat demand for new mines — but so is the potential reward.
Gold Miner Bear Play: Direxion Daily Gold Miners Bear 3X Shrs
YTD Performance: -17.4%
Assets Under Management: $40 million
Expense Ratio: 0.95%
If you think gold is headed north along with inflation, and thus think miners are headed south, Direxion Daily Gold Miners Bear 3X Shares (NYSE:DUST) might be the fund for you.
DUST is a triple-leveraged inverse ETF — it aims to deliver 300% of the opposite daily return of the Market Vectors Gold Miners ETF’s underlying index, making it the ultimate bet against the fortune of gold miners (albeit one with expensive fees).
Be cautious: Like all leveraged ETFs, DUST uses derivatives to dramatically boost index returns on a daily basis — in this case, on the short side. The leveraged aspect of DUST can make it a quick road to riches — the fund has gained more than 40% in the past month as miners’ fortunes have soured — but also a quick road to losses.
This ETF is unsuitable for a buy-and-hold strategy, but if you have a strong, short-term hunch, as InvestorPlace Assistant Editor Kyle Woodley illustrates, leveraged ETFs can be one of the most profitable ways to play it.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities