Gold has been at the forefront of the investment markets for hundreds of years. Some historians believe that investment in gold started as early as the year 628, and has gone from being the accepted currency in many countries to being the commodity that all other metals are judged against. (To learn more, see 8 Reasons To Own Gold.)
As popular and widespread as gold is, there are only a few ways for investors to trade the precious metal. The first way is to own the physical product. The price of gold has gone up so rapidly that vending machines now exist where people can buy small amounts of gold at the daily commodity price. But short of that, gold bullion is the only other way besides investing in jewelry or other products containing gold.

Another popular way to invest is by way of exchange traded funds (ETFs). We've picked three of the most popular gold ETFs to look at, each of which allows the investor to invest in gold in different ways.

IN PICTURES: Retire A Millionaire In 10 Steps

SPDR Gold Shares GLD
For the investor who wants to directly play the performance of gold bullion, GLD is the ETF of choice. Some commodity ETFs are criticized because their large size produces high volumes of trades, which can cause false movements in the underlying commodity. The SPDR Gold Trust (NYSE:GLD) owns a large amount of gold bullion, in part, to prevent this from happening.

One word of caution when investing in any of these ETFs: There are management fees built into the price that can degrade profits. If gold rises 1% in value in six months but you notice that GLD does not, the reason for that is most likely management fees and rebalancing. For those reasons, some market pundits do not believe these ETFs make for efficient long-term investments. In their view, the longer these funds are held, the more money is lost due to rebalancing.

ProShares UltraShort Gold GLL
For those investors who have been holders in the ProShares UltraShort Gold ETF (NYSE:GLL) in 2010, we're sorry. Gold has been on a constant and dramatic trend higher in 2010, and for that reason, investors who held a short position in a gold ETF, a lot of money has been lost. In fact, GLL is down close to 40% for the year.

The GLL is a leveraged ETF, which means that this fund moves twice the amount in the opposite direction of gold. That's a lot of big words to say that, when gold loses value, you make money. Assume that the price of gold drops 1.5% on a given day. GLL will move twice as much in the opposite direction, so when gold drops 1.5%, GLL will rise 3% (before fees). Don't forget that management and rebalancing fees are built in to the price, so the movement will be slightly less than 3%.

Invest when you believe that gold will lose value. Leveraged ETFs - those that move twice (or even three times) as much as the underlying asset - are largely used by day traders to catch short-term movements in a stock. It is not advised to use this fund as a long or even medium-term investment vehicle.

IN PICTURES: 10 Reasons To Add ETFs To Your Portfolio

Market Vectors Gold Miners ETF GDX
What if you don't want to invest in the actual movement of gold bullion? There is another way to make money in the gold market, and that's by investing in companies that mine, process or sell gold, like the Market Vectors Gold Miners ETF (NYSE:GDX). This is a different kind of investment, because when you invest using GLD or GLL, you're tracking the price of gold, the commodity. When you invest in gold companies, you're investing in a company's ability to make money. You must have confidence in the company's management, balance sheet, earnings potential and everything else you evaluate when investing in a company.

The Commodity or the Company?
Because the market changes every day, we can't tell you which is the better investment for you, but there's an easy way to answer that question for yourself. Go to your brokerage website and generate a chart for GLD. All brokerage sites should allow you to place multiple stocks or ETFs on the same chart, so add GDX to your GLD chart. Is one clearly outperforming the other?

The Bottom Line
You can find gold in the portfolios of a majority of professional investors. If it's good enough for them, it's good enough for all of us, but be careful - gold has been on a dramatic upward rise in 2010. "Buying high" can be dangerous. (To learn more, check out Getting Into The Gold Market.)

For the latest financial news, see Water Cooler Finance: Ghosts Of Economies Past.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  4. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  8. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  10. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  4. Lion economies

    A nickname given to Africa's growing economies.
  5. Christmas tree (oil and gas)

    A vertical assembly of mechanical elements used in oil exploration ...
  6. FPSO (Floating Production Storage ...

    Acronym for Floating Production Storage and Offloading. FPSO ...
RELATED FAQS
  1. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  4. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  5. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>
  6. What are some of the most popular ETFs that track the retail sector?

    Some of the most popular exchange-traded funds (ETFs) that track the retail sector include the iShares S&P Global Consumer ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!