Page 79 - Introduction to investing in Gold

A gold Exchange Traded Fund (ETF) is an investment fund that sometimes holds physical gold to back its shares. The share price tracks the price of gold, and it trades like a stock. However, sometimes investors don’t have a claim on any underlying gold.
ETFs are a hybrid between mutual funds and individual stocks. On the one hand, they are like gold mutual funds in that they are funds that hold an entire portfolio of assets (in some cases, physical gold, whilst in others, it may be derivatives, perhaps a mixture – you need to check).
They are like individual stocks in that they trade on stock exchanges (unlike mutual funds), so they are easy to buy and sell.
The concept is simple – Gold ETFs are intended to mirror the per-ounce price of gold. In theory, the shares of the ETF should move in tandem with the price of gold. Unfortunately, that’s not always the case. Sometimes the movement in the ETF price does not directly mirror the gold price. They are a decent approximation of gold, but they are not as perfect as you’d want them to be.
There could be a discrepancy because of the supply and demand of ETF shares versus the price movement of physical gold. If the shares are in high demand, then investors may be willing to pay a premium. Similarly, if there’s particularly low demand, there could be a discount.
Gold ETFs are very popular. On the plus side, they’re convenient, easy to trade, there’s no need to store anything, and no one is going to break into your house to steal your ETF shares. But there are also some pitfalls that few investors are aware of. I think it makes sense to be aware of these before rather than after another financial crisis, so I’ll touch on these later.
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