I know from marketing experience that there are many out there who, for one reason or another, really like putting their money into mutual funds
instead of expending the energy to invest in individual stocks (and/or bonds). For the most part, the various rationales all share the common theme of trusting full-time “Money People” to do the work that individuals feel they don’t have the time or expertise to do for themselves.
But, I know that there are those contrarian investors who are intent on thinking for themselves. My deduction is that if an investor wishes to be thoughtfully responsible but at once cautiously moderating about risk, then ETFs are the way for him to go. After all, there has to be a reason behind Charles Biderman, president of TrimTabs Investment Research, telling us that “[ETFs] are definitely taking market share away from the more traditional mutual funds.”
The sexy ETF that I have in mind is StreetTracks Gold Trust.
I love gold. The price of gold has risen 73% since 1999. It is truly a bedrock asset. It truly “represents the ultimate form of payment in the world”, as Alan Greenspan told the US House Banking Committee in 1999. Gold is “real money”. It’s not a derived abstraction. It’s there. And the supply-and-demand dynamic that it engenders renders it eternally bullish. Central banks, which are the largest holders of bullion, have not been selling gold in recent years to the extent that they were before 2001. This puts higher market pressure on each year’s supply of mined gold and relentlessly drives up the price of the precious metal of kings.
StreetTracks Gold Trust has already attracted almost $2.5 billion from investors since it was launched on November 18 of 2004. Individuals investing in the fund don’t need to purchase futures contracts nor worry about potential delivery of the metal itself. Shares of gold ETFs represent ownership in fractions of ounces of gold bullion held in a vault.
Investing in gold can be analogized to investing in a stock like Coca-Cola. If there is a recession in the marketplace, do people stop drinking that soda? If there is a recession in the marketplace or a drop in the dollar, do companies stop mining gold?
If you are thinking of getting into a mutual fund, then you might want to consider going for the gold, instead.
This does not mean that one should just rush in where professionals fear to tread. David Rynecki wrote in Fortune magazine, “Gold investors are notoriously bad forecasters. From 1985 to 1987, for example, a collapse in the dollar boosted gold 76% and had many metalheads predicting an extended rally. Instead the price fell 15% the very next yearÃ¢Â?Â¦Even bullish gold pros caution the average investor to put no more than 5% of a total portfolio into gold-related holdings and say it’s safest to invest through funds.”
But, that is precisely what makes the StreetTracks Gold Trust ETF so attractive. It is a fund, albeit one that trades just like a stock instead of being managed just like a mutual fund. ETFs are giving investors a buzz for several reasons. They are tax-efficient; their expense ratios are significantly lower than those of mutual funds; they offer an inexpensive way into the stock market for those investors who find it difficult to meet minimum investment requirements for brokerage accounts; and they are user-friendly. However, that friendliness can be a double-edged sword for those without sufficient measures of reason or wisdom; for given the fact that ETFs trade just like individual stocks on the exchanges, an overzealous investor with itchy trigger fingers could rack up a ton of brokerage fees, thereby completely negating the advantages of the low expense ratios (and possibly missing out on big spikes in share prices).
Getting back to the golden meaningÃ¢Â?Â¦Dr. Stephen Leeb of The Complete Investor is very bullish on gold. Looking at the latest surge in gold prices, he contends that the dollar has rallied alongside gold in recent weeks. “Gold and the dollar have broken apart,” says Leeb. “The recent run in gold has come in the face of dollar strength and suggests that investors are fleeing all paper money.” Leeb says that the U.S. dollar has become vulnerable because the Federal Reserve no longer seems to have the power to slow economic growth or control inflation rates. “A powerless Central Bank is clearly a major inducement for holding gold,” says Leeb. “Long-term real interest rates are the lowest they have been since the late 1970s, and after-tax real interest rates are negative, which is a major positive for gold.”
“Given the amount of leverage in the world’s economy–and in particular in the U.S.–central banks are in no position to risk deflation. Inflation is the likely course, with gold being a natural beneficiary.”