Investors who wish to make gold part of their portfolio can do so in three ways. First, they can purchase actual bullion or gold coins. Aside from buying the physical metal, stocks of gold companies are another popular option, as are gold funds. A gold fund can be either a gold mutual fund or a gold exchange-traded fund (ETF). A gold fund can be a very sound investment, especially in times of economic uncertainty, since gold has traditionally been used as a hedge against inflation and other forms of financial risk.
Gold funds are used commonly by gold investors for many reasons. One of the main reasons is that gold, as well as other precious metals, can be quite volatile in terms of price. Also, the price movements of gold may or may not be correlated with general market conditions at any given time, making them difficult to predict with accuracy. Logistical issues also come into play for those who purchase the actual metal, such as storage or safe-keeping. This can be stressful by itself because of the time and considerations involved in finding a good place to store precious metals.
Individual stocks from companies which mine, distribute, and process gold are subject to as much volatility as any other stocks, as well as to general market conditions. A gold fund, particularly a gold mutual fund, is a good alternative to these types of risk, since it would include many stocks and would be diversified in such a way as to minimize risk while still offering the potential for profit. The management of a gold fund would also be done by professionals. These considerations make gold mutual funds a relatively safe way to include gold in a portfolio.
A gold ETF is an even safer type of gold fund. With a gold ETF, investors simply purchase shares in a fund which tracks only the price of gold, rather than gold stocks. Gold ETFs eliminate any storage-related concerns, and have what investors may see as a distinct advantage over some gold mutual funds.
Specifically, some gold mutual funds use options and other forms of leverage in an attempt to enhance returns. It is not uncommon for mutual funds to be managed in this way. Even though it is composed of a group of many stocks, a mutual fund may take on a life of its own, because its price, like that of an individual stock, fluctuates based on how many shares of the fund are being bought and sold.