ETFs(Exchanged-traded funds), or Trackers, are investment funds trading on stock market exchanges just like stocks. These funds reproduce the performance of assets, stocks (stock indices), currencies, commodities or bonds. They trade near the value of their underlying assets. These funds are passively managed, their goal being simply to track the evolution of an asset, not to surpass it. The growing popularity of ETFs since 2008 stems from their low management fees and the lost confidence of investors in traditional fund managers who actively manage their portfolio and charge a hefty price without actually doing better than the stock indices.
We should distinguish between ETFs and ETCs (Exchanged-Traded Commodities), which track the performance of commodities by either holding them physically or via futures or other financial products.
SPDR Gold Shares (GLD) are the most important ETC based on gold and the second most important of all products. It is traded on the New York, Hong Kong, Singapore and Tokyo stock exchanges. Each share is backed by 1/10 oz. of gold. The gold is held mainly in HSBC’s London vaults in the form of 400 oz. good delivery bars. This fund has drawn some criticism due to its complex structure and its relation with certain commercial banks that could cause conflicts of interest, notably with HSBC which, while stocking the fund’s gold, also holds very large short positions on silver price and gold price.
The HUI Gold BUGS (Basket of Unhedged Gold Stocks) index is a tracker that follows the performance of gold mining companies that do not hedge their gold production for a period exceeding 18 months.
List of companies on the HUI:
Barrick Gold Corporation
Agnico Eagle Mines Limited
Kirkland Lake Gold Ltd.
AngloGold Ashanti Limited Sponsored ADR
Kinross Gold Corporation
Gold Fields Limited Sponsored ADR
Yamana Gold Inc.
Novagold Resources Inc
Alamos Gold Inc.
SSR Mining Inc
Compania de Minas Buenaventura SAA Sponsored ADR
Equinox Gold Corp.
Harmony Gold Mining Co. Ltd. Sponsored ADR
Pretium Resources Inc.
Eldorado Gold Corporation
Coeur Mining, Inc.
The GDX index offers some exposure to the gold mining industry. It is comprised of companies from all over the world which operate mainly in gold production. They hold shares in small-, medium- and large-market capitalization companies.
These funds offer some indirect exposure to gold through shares, but their structure is relatively complex and opaque. Most of the time, the gold is stored by commercial banks such as HSBC and JP Morgan. While the low costs are attractive, one is exposed to several counterparty risks: broker default, fund bankruptcy or clearing house default.
At GoldBroker, we recommend direct gold ownership, with no intermediation, and storage outside of the banking system.