As gold prices continue to increase, individuals who invest in gold mining ETFs have seen the cost of their shares rise exponentially over the price of the precious metal. Some of these ETFs track the price of gold but are easier to purchase than gold bullion. They represent reduced risks versus investments such as futures contracts and some stocks. However, they are also more vulnerable to market price fluctuations that occur in situations of reduced demand.
The ETFs that hold shares in mining companies are recommended by some analysts over those that have holdings of physical gold. If prices experience only modest increases, mining companies will still benefit from the exploration and production of gold. There are two mining ETFs to consider if this is the investment vehicle of choice.
The Market Vectors Gold Miners ETF tracks the Amex Gold Miners Index and its value has doubled during the past year. Another fund that doubled in value over the last year is the PowerShares Global Gold and Precious Metals Portfolio, which tracks the NASDAQ OMX Gold and Precious Metals Index. This fund includes diamond and platinum mining companies in addition to the leading silver and gold companies included in the Market Vectors fund.
A gold mining ETF allows an investor to encapsulate the performance of the entire gold sector by holding a single, but well-diversified, investment. It is an easy way to spread the risk inherent in any one stock that is held within the fund. This means that market dips affecting one stock inversely will not be felt as strongly if other shares experience a small increase.
The mining companies who offer stocks in these funds pay dividends, have a depleting base of assets, and are more suitable for short term investment or preservation of wealth than gold bullion. In addition to being subject to stock market volatility, they are sensitive to management, environment, geopolitics, mine life, financial strength, hedging policies, energy costs, and productivity. All of these factors should be taken into consideration prior to investing in a gold mining ETF.
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