DEFINITION of Gold Fund
Gold fund refers to a mutual fund or exchange-traded fund (ETF) that invests primarily in gold-producing companies or gold bullion. The price of shares within a gold fund should correlate very closely to the spot price of gold itself, assuming the fund holds the majority of its assets in bullion or in the stocks and bonds of gold miners and manufacturers.
BREAKING DOWN Gold Fund
Gold funds are a valuable tool for investors wishing to hedge against geopolitical instability or overall inflation. For most investors, gold is primarily used as a hedge rather than as a primary investment. Of course speculators can find many opportunities for trading gold funds due to the volatility that comes with gold’s reputation as both a hedge and safe haven in turbulent times.
Gold ETF Funds
ETF gold funds are basically a more convenient way of owning physical gold. Rather than acquiring and storing gold bullion or bullion coins, an investor simply purchase units of ETF which has physical gold underlying it. This allows for an investment in gold without the hassle of storing it and securing it against theft. The clear linkage with physical golds also means that the value of the ETF units moves in tandem with global gold prices.
Gold Mining Funds
Gold mining mutual funds are a very different animal. Although the fund shares will move more or less in tandem with the price of gold, the mechanism is much different. Investor in a gold mining mutual fund are buying portions of a professionally managed portfolio of companies involved in the gold industry. Depending on the investment approach, this may just be pure gold mining companies or it may include any company on the gold value chain, including wholesalers, jewelry manufacturers and retailers. That said, most gold funds focus in on mining for the majority of the holdings.
The interesting thing about gold mutual funds is that the price of gold can actually swing the performance of the portfolio more than an ETF gold fund. The costs to mine an ounce of gold for a specific project are fixed, but the price paid for an ounce on the open market varies widely. So a small swing in global gold prices can potentially double or halve the profit a company realizes from their operations – this, in turn, drives the gold fund’s overall performance for better or worse. Moreover, the balance sheet and management team of the underlying companies can impact the performance of the underlying shares in a gold mutual fund as much or more than the price of gold in some circumstances.
Gold funds, both the ETF and the mutual fund variety, have their place in a diversified portfolio, but it is important for investors to know what they are buying and why.