End of post – all of you can go home now!
No, just kidding – I got this question in a comment yesterday, and I thought I’d do a quick post on it due to the immense popularity of gold ETFs, and the confusion that surround it.
ETFs are like mutual funds that also trade in the stock market, and you can think of gold ETFs as mutual funds that don’t hold stocks of other companies but rather hold gold deposits.
The price of mutual funds depend on the price of the stocks they hold, and the price of a gold ETF depends on the price of gold.
If gold prices fall then price of gold ETFs will fall, and there will be a loss on your investment. So, the fall in the price of gold is one of the main risks you need to worry about.
Now, it is quite likely that folks are telling you that gold prices never fall, it is an ultra safe investment, countries around the world are debasing their currency by printing money, the days of fiat money are over, this time is different therefore gold will never fall in value, and by virtue of that gold ETFs are risk free, but these are merely opinions.
Gold prices can continue to rise, or they can drop like a stone – no one knows for sure – remember that a lot of people thought that house prices never fall, but look what happened there.
There is risk in gold investment, especially now when retail investors are so keenly interested in it, and you should tread this with caution, you can make money, but you can lose money as well.
The original comment also had a question on how can you buy a gold ETF, which is answered here, and another one on how much profit should be expected, and I can honestly say that if I knew how much profit is to be expected then I wouldn’t waste my time writing this blog.