A Look at Gold ETFs: Which Is the Best Way to Own Gold?

Source: Thinkstock

Source: Thinkstock

With gold having corrected by about $600/ounce from its all time high back in 2011 and with the Federal Reserve continuing its loose monetary policy, now is probably a good time to be buying gold. This sentiment is further supported by the somewhat unnerving producer price index figures that were released on Wednesday that show that inflation is picking up. While the Fed continues to taper, the fact remains that a lot of new money has entered the financial system over the past few years, and it often takes some time before we start to see this new money bid up prices of things such as gold and consumer goods.

But what is the best way to own gold? For about 10 years now, investors have had access to gold ETFs, which track the price of gold. The most popular of these is the SPDR Gold Trust (NYSEARCA:GLD), although several others have popped up, including:

  • The ETFs Gold Trust (NYSEARCA:SGOL), which holds its gold in Singapore.
  • The Sprott Physical Gold Trust (PHYS), which is structured like a company, so that your gains are taxed at the capital gains rate (15 percent or 20 percent) as opposed to the collectible rate (28 percent.)
  • The Credit Suisse Covered Call Gold ETF (OTCMKTS:GLDI), which is long gold futures, but which also holds covered calls against the gold so that the position is hedged, and so that it generates an income.

There are a plethora of others out there, but they don’t really expand your options in a meaningful way. With these funds investors now have access to a variety of strategies that will benefit should the gold price rise.

The GLD is the most popular fund, and it is also the most liquid. However, as I go through the other funds, it will become clear that it offers a very simplistic form of gold exposure, and it more or less serves as a trading vehicle. If you are concerned about actually getting your gold, or if you want long-term exposure to gold, then GLD is not for you. But if you think that the gold price will rise $50/ounce in the next two weeks, then your best bet is to buy GLD shares.

If you are bullish, but are concerned about holding your gold in Canada, the United States, or Europe, then SGOL is an intriguing option. Singapore is often considered to be a capital-friendly environment, and as a result investors might think that it is a safe place to put your gold.

If you are more concerned about holding gold for the long-term and paying as little tax on it as possible, the Sprott Physical Gold Trust is right for you. You typically have to pay a premium to the spot price of gold in order to buy the PHYS because of the favorable tax treatment. The fund’s custodial situation is also far more simple to understand than the more popular GLD. The PHYS simply holds its gold in Canada, whereas the GLD’s prospectus allows for its gold to be held by a variety of companies, and GLD shareholders don’t have to approve of their gold being shipped somewhere else. This probably doesn’t matter most of the time, but if there is a real panic and people are concerned about not just owning gold, but about being able to get their gold, you can see PHYS trade at a substantial premium to GLD.

If you are less bullish of gold you may want to consider the GLDI, which won’t rise as much as GLD if the gold price spikes, but if gold stays flat, goes down, or goes up slightly, then you are better off in GLDI. Note that the income you get from the fund’s annual payments are not capital gains, and they are taxed at your income tax rate.

Ultimately, we have seen that ETFs have greatly expanded the retail investor’s ability to replicate some fairly complex gold trading and investing strategies. We have looked at four of them here, and we can concoct some even more complex ones using a combination of these strategies. For instance, let’s say that you are ultimately bullish of gold, but you want some downside protection while retaining exposure to the upside in the event of a price spike. You could buy GLDI shares, which will go down less if gold falls, and which will also pay a dividend. You can then take that dividend and buy out of the money calls on the GLD. If gold soars, you will still retain your exposure through the options, and they will have cost you nothing because they were funded by the calls sold by GLDI.

As an investor you can come up with a wide variety of strategies, and these ETFs give you various ways to get gold exposure.

Disclosure: Ben Kramer-Miller has no position in the funds mentioned in this article.

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