Understanding and Using Silver and Gold ETFs

Exchange Traded Funds

ETF is short for exchange traded fund and they are listed on the stock exchange just like any stock. For silver and gold, they are listed as SLV and GLD respectively. When you buy an ETF, you are buying a bit of the commodity that the ETF is associated with. They are considered to be financial instruments.

The benefits of ETFs are the ability to buy and sell them for a very small fee. This is the opposite of buying some silver and gold coins or bullion, hiding them somewhere or paying for a safe deposit box, then needing to physically deliver (and prove that they are genuine) them to sell them when you need to convert them back to cash.

If you are investing in ETFs as a form of financial insurance, you should be aware of the limits of the ability of the fund to back them up. Most ETFs are not completely backed up by the commodity represented by them. Accounting procedures vary, but basically many ETFs also loan out the same commodity that they are holding. There is a possibility that in a financial meltdown, that the same silver or gold commodity could be owned by several people.

If you are looking for a 100% solid form of financial insurance, then you need to invest in gold holdings. The most popular company for this is GoldMoney which actually buys and stores physical silver, gold, platinum, or palladium in your name. They are independently audited to confirm their holdings and you can actually get the metal from them if necessary.

The disadvantage of GoldMoney is that you have to pay a small fee each year to store, protect, and insure your precious metals. They are currently storing over $1.4 billion dollars worth of precious metals for over 17,000 customers.

Take a golden ride with ETFs
Take a golden ride with ETFs

Flavors of Silver and Gold ETFs

Not all silver and gold ETFs are the same. Some of them are leveraged, allowing you to make or lose additional money on price swings. Leveraged ETFs are referred to as double or triple ETFs. Many of them take advantage of the futures market. Here is a list of ETFs:

  • GLD: The most popular gold ETF which buys and sells tenth ounce shares. They are considered to be the safest financial instrument with respect to gold.
  • SLV: The most popular silver ETF which buys and sell one ounce shares. There has been some speculation that they are not fully backed, but this would probably only be an issue in the event of a total economic meltdown.
  • UGL: (ProShares Ultra Gold) This is a margin account for gold at a 2 to 1 ratio. If the price of gold goes up 5%, then this ETF will go up 10%. The opposite is true also, if the price of gold goes down by 5%, then this ETF will go down by 10%. Theoretically, a 50% drop in the price of gold could cause this ETF to disappear.
  • AGQ: (ProShares Ultra Silver) This is a margin account that works just like UGL, but is based on silver instead. It's price swings at double the price change of silver.
  • DGL: A gold indexed based fund. The amount earned is rule based, but basically you have some leverage with gold. The fund uses future contracts, but also earns some interest. If you are bullish on gold, then this could be a great way to go.
  • GDX: This is more like a stock fund (but without the management fees) and invests in gold mining companies.
  • GLL: (ProShares UltraShort Gold) This is the opposite of gold. Investing in this ETF and you are betting on the decline of gold. A 5% drop in the price of gold and this ETF will go up by 10%.
  • Triple ETFs: Google "triple gold etf" and you will see other leveraged gold investment vehicles based on either mining stocks or gold itself. You can do the same thing with other ETFs like silver, platinum, or even oil. Thanks to Google and the internet, knowledge is free.

Silver may be the best long term investment due to it's many industrial applications.
Silver may be the best long term investment due to it's many industrial applications.

Which commodity is better? Silver or Gold?

You might be wondering which metal makes the better investment. The good news is that you will probably make money no matter which one you choose. With governments around the world printing money like crazy, it is pretty much guaranteed that all ETFs will go up. And I don't mean just silver and gold, or even precious metals. You could probably invest in oil or rice ETFs and still make a killing.

But it would still be nice to know which one will make you the most money. And for that, I am the most bullish on silver. The reason for this is that silver has historically traded at about a 15 to 1 ratio to gold. Currently, the ratio is over 40 to 1 compared to gold. It takes over 40 ounces of silver to buy one ounce of gold.

While gold is the ultimate form of money for the rich, silver has always been considered to be the money of the poor. Silver coins make up the predominant trade unit for economies based on precious metals.

I believe that if the world reverts to an economy based on precious metals, then the demand for silver will increase until it reaches the 15 to 1 ratio favored by earlier precious metal economies. And that is just to meet the demand for silver coinage.

But the long term situation for silver looks even stronger due to the fact that silver is used commercially. Silver is a much better electrical conductor than copper making it necessary for many electronic devices. The amount used in each device is very small, but the aggregate total could start to have a heavy influence on the price of silver as this silver is pulled off the market by industry.

The very long term ramifications of industrial uses for silver could push the price ratio of gold to silver very low. I wouldn't be surprised by a future ratio of around ten to one. In other words, if the price of gold reaches $10,000,000 per ounce by 2050, then the price of silver would be a $1,000,000 per ounce.

By the way, you may laugh at my $10,000,000 per ounce estimate for the price of gold by 2050. However, I consider that number to be fairly conservative. The price of gold has gone up by almost ten fold in the last two decades. The rate of inflation is accelerating and I figure a ten fold increase in the price of gold each decade for the coming decades is very reasonable. At that rate, it will take less than 3 decades to reach a value of over a million dollars per ounce for gold.

Exponential mathematics is beautiful and the power of compound interest is incredible. It only takes a 26% return each year to multiply your investment by ten fold each decade. This will be the decade of the new wealthy thanks to ETFs.

Which leaves just one more question. Are you going to join the ride?

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Comments 2 comments

Pente profile image

Pente 5 years ago from Planet Earth Author

Thank you for the comment Mr. Tindle. It is always wise to be aware of worst case scenarios when investing in ETFs.


Mr Tindle profile image

Mr Tindle 5 years ago

Pente,

Good and informative hub for the most part. You are right to mention that these precious metal ETFs should not be viewed as 100% insurance. The backing is definitely suspect on many if you read through the prospectus. Personaly I have always thought they worked well to trade the spot prices of silver and gold directionaly though.

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