A gold fund is a type of investment fund that typically has physical gold bars, gold futures contracts, or gold mining companies. Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a way to diversify risk, especially through the use of futures and derivative contracts. The gold market is subject to speculation and volatility, just like other markets.
Compared to other precious metals used for investment, gold has been the most effective safe haven in several countries. A gold futures contract is an agreement to buy or sell a certain amount of gold at a later date. The contract itself is what is traded on an exchange. Gold futures enjoy more liquidity than physical gold and have no management fees, although brokerage houses may charge a trading fee (also called a commission) per contract.
Keep in mind that trading futures contracts involves a lot of risk and is not a suitable investment option for an inexperienced investor. The amount of money you can lose with these investments may exceed your original investment. The SPDR Gold Shares (GLD) ETF, for example, contains physical gold and deposit receipts, and its price follows the price of physical bars. VanEck Vectors Gold Miners ETF (GDX), on the other hand, is a passively managed fund that tracks an underlying basket of shares in gold mining and refining companies.
Throughout history, few investments have rivaled gold in popularity as a hedge against almost any type of problem, from inflation to economic turmoil or currency fluctuations and war. With gold and silver futures contracts, the seller undertakes to deliver the gold to the buyer on the contract expiration date. If you're worried about inflation and other calamities, gold can provide a safe haven for your investments. At the end of 2004, central banks and government organizations held 19% of all gold on the ground as official gold reserves.
Although gold tends to be in greater demand, many investors consider both gold and silver to be safe haven investments. Gold funds are popular investment vehicles for investors who want to hedge against perceived inflation risks. Bullion banks generally only trade quantities of 1,000 troy ounces (31 kg) or more in assigned or unallocated accounts. Gold exchange-traded funds or mutual funds have more liquidity than owning physical gold and offer a level of diversification that a single stock doesn't offer.
When a central bank lends gold to bullion banks for a specific period, say three months, it receives the cash equivalent of the gold lent to the bullion bank. They were first issued in the 17th century when they were used by goldsmiths in England and the Netherlands for customers who kept gold bullion deposits in their vault for safekeeping. A mining company would also borrow gold if it entered into a term hedging contract in which gold, which has not yet been extracted or extracted from the land, is pre-sold to buyers. In fact, when looking at longer time horizons, such as in the past 30 years, the Dow Jones Industrial Average, a good representation of the general stock market, has significantly outperformed gold.
However, such advice is so popular that demand tends to skyrocket at that time, depleting gold reserves faster than they can be replenished.