The Gold Index Fund: Pros and Cons

Investing in a gold index fund gives you the ability to speculate on gold through a traditional fund arrangement. This type of investment has become more popular over the years as people look for alternative forms of investment. This type of investment carries with it some advantages and disadvantages to be aware of. Here are some of the pros and cons of the gold index fund.

Speculate on Gold

One of the big advantages of this type of fund is that it allows you to speculate on the price of gold. The gold index fund will closely track the price of gold. If you want to speculate on gold without getting involved with this fund, you have to buy gold bullion or get involved with futures contracts. These alternatives are not favorable for investors because they are not practical or simple. With gold bullion, you have to find someplace to store the gold. With futures contracts, you have to open an account with a futures broker, and the process can be kind of confusing. With the gold index fund, you can simply buy shares through a normal brokerage account. 

Liquidity

Another advantage of investing in the gold index fund is that it is highly liquid. If you want to buy or sell shares, you can simply contact your brokerage and do so. If you had physical gold, it could be a bit harder to buy and sell. Being invested in a gold index fund allows you to quickly react to market influences that could impact the value of your holdings.

Inflation Hedge

Another potential advantage of the gold index fund is that it provides you with a hedge against inflation. When you invest in securities like stocks, they are tied directly to the performance of the economy. When you invest in a physical asset like gold, it will retain its value even when the economy is doing poorly. It will keep up with inflation because it is a physical asset.

Costs

One of the potential disadvantages of investing in the gold index fund is that it costs money to do so. You have to pay a management fee to the fund manager. Operating expenses will be a certain percentage of the total value of the fund every year. This can significantly reduce your profitability over the course of your investment. You may also have to pay commission to your broker when you buy and sell shares. If you buy and sell frequently, you will increase your transaction costs and lower your overall profitability. 

No Control

Another potential disadvantage of investing in a gold index fund is that you do not have any control over the gold itself. You are simply purchasing shares from a fund management company that is in charge of the investments. There have been scandals in the past with financial companies, and when you cannot see the physical gold, there is always the chance that you could be dealing with another scam. 

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