Should we be investing in Gold ETF?

The recent proliferation in gold products have resulted in gold prices shooting through the roof in 2011. Recent days have seen a long awaited sharp correction in gold prices. However, gold bulls are still backing the yellow metal to exceed $2,000/oz in 2012. One of the gold related products are that of Gold ETFs. This investment vehicles act like stocks, giving investors a easy venue to invest in the precious metal. However, will it be wiser to invest in physical gold bullion/coins or does ETFs investment really make sense?

Long term investors have been pouring into such Gold funds in the hope of benefitting from the rise in the price of the yellow metal. Sometimes it is effective while mostly it doesnt.

In reality, ETFs are yet another product of the derivative market which consist of a variety of swaps, futures, forwards with thier underlying value tied to something else other than that of gold. These products effectively increase your risk profile without necessarily increasing your exposure to gold. They are sort of a marketing gimmick which is attracting a huge followings due to their ‘simplicity’ in terms of access by retail investors.

The ETF business is one of the fastest growing in the country with expected growth as much as 15% in 2011. Billions of dollars have been spend investing in such gold products. Just scanning the average investment magazine and you can easily spot a dime of such advertisements on such products. There is a good reason for that which is these ETFs are moneymakers but not for you and me. Yes, it is often the creaters that are making big bucks from the creation of these products by charging management fees.

Granted that that fees are minimal compared with the exorbitant charges hedge fund used to charge their clients, it does make sense if such products are able to provide proper tracking for the underling asset. For 2011 YTD, Gold have returned 14.3% to investors. For an investment in the biggest gold ETF which is the SPDR Gold shares ETF (GLD:NYSE) with its $72 billion worth of assets, the 2011 YTD return is 11.9% with a difference of 2.4% before a further management charge of 0.4%.

Moreover there are other risk like counterparty risk involved. I will provide further elaboration on investing in Gold ETF products at