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« Silverado: Up 10.31% on resources estimate | Main | Testimonials »

Leveraged Gold ETF’s: The End of Gold Stocks

During the last major rally in gold prices, gold stocks made some great gains and investors such as yours truly were happy to take good profits on the gold mining companies we had bought over the summer doldrums. However we should have seen a much better performance.

Leveraged Gold ETF’s: The End of Gold Stocks

Firstly, lets take a look at some of the main investment vehicles.

Physical gold bullion: There are advantages to holding the actual metal in your hand, but there are issues regarding secure storage and liquidity. However this is still a relatively “safe” way to play the gold bull market.

Gold ETF's: These will track the price of gold almost exactly. However, not all ETF's hold physical bullion, so not all are “as good as gold”.

Gold Stocks: These companies will (hopefully) make more money with higher gold prices as they can sell every ounce of gold mined for so much more. Therefore the stock price should rise with rising gold prices at a ratio somewhere between 2 and 4 to 1.

Derivatives: These financial instruments include futures, forwards, options, and swaps and are not for every investor, but provide the greatest leverage to the gold price. However these are usually favoured by traders who have a shorter term outlook than investors.

Usually the investors will opt for one of the first three vehicles, with derivatives being somewhat of a specialist area.
We have chosen to invest in gold stocks as we wanted to be able to close positions swiftly if necessary and we liked the leverage to the gold price that gold stocks offered.
Although we do hold a small amount of bullion “just in case...” the majority of our capital has been invested in gold stocks as we could buy and sell at the click of a button and gain a decent leverage to rising gold prices. We like the idea of being able to virtually trade gold bullion with an ETF but we didn't see the point in buying a gold ETF when the stocks provided sufficient liquidity and more leverage.

But now the whole investment landscape is changing...

Leveraged Gold ETF’s: The End of Gold Stocks?

The whole problem that we had with the gold ETF's is that they didn't offer the same leverage as gold stocks. However these new leveraged ETF's may solve this problem.

In the last couple of months we have seen the emergence of some new gold ETF's offering 200% exposure to the gold price. With many gold stocks barely offering 1:1 leverage to gold in the recent rally, these investment vehicles appear very attractive to us, and no doubt other gold bugs.

In fact, with these new leveraged gold ETF's is there actually a need to own gold stocks?

We do not see the reason to own gold stocks if a ETF is going to offer you decent leverage that is actually tied to the gold price, not to a company's press releases. Remember a stock can be affected by rising production costs and political instability in area of mining. In addition to this if one is not investing in mining companies, one does not have to devote time to the analysis of geological results, management teams, balance sheets and company operations. This leaves more time for gold itself, the general market and the economy, which should lead to better investment decisions as one can concentrate on the precious metals bull market, rather than company details.

So we see very little reason to buy positions in gold stocks in the future and we are going to give some serious thought to moving from mining companies to leveraged ETF's over the coming months. If 200% exposure isn't enough, then one can always buy on margin and increase that leverage to 400%. One can also go short by buying an inverse ETF, allowing one to profit from both the ups and downs of the the bull. Gold stocks may get a boost in the final leg of the bull market though, as “the herd” stampedes in and forks out cash for anything that glitters. And of course, the gold mining companies will still make a lot of money as gold prices continue to rise, but we feel the ETF's offer a slightly better deal. Also, bear in mind that the 200% leverage offered by ETF's is a mathematical relationship, whereas the leverage from mining stocks is a rough estimate of what might happen, in other words: a hopeful guess.

Aside from taking profits on some of our holdings in late February, we haven't gone out and dumped all our stocks. We still hold a core position but we are considering transferring this to an ETF based portfolio and we will most probably use cash generated by our February profit taking to begin to build positions in leveraged gold ETF's when we feel that this correction has run its course and begun to consolidate.

These are fast changing times and its essential that you stay up to date with what is going on in the market. For our latest commentary and trading signals on gold, click here to subscribe to The FREE Gold Prices Newsletter and click here for The FREE Silver Prices Newsletter.

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Reader Comments (11)

Will you be publishing a list of sound gold/silver ETFs in the near future??

May 1, 2008 | Unregistered CommenterMack

I'm concerned about the tax aspects of these ETF's. Is there a tax difference with these as compared to the stocks?

May 1, 2008 | Unregistered CommenterGlenn

What ETF are you looking at that provides 200% leverage to the price of gold?

May 1, 2008 | Unregistered CommenterCouraggio

Can anyone provide the symbols for the leveraged gold/silver etfs ? I searched, but couldn't find any. TIA, Charlie

May 1, 2008 | Unregistered CommenterCharlie

Nice to see the leveraged ETF getting their due. The Canadian listed Horizons Beta Pro products are a boon to investors with x2 leverage, without the concern of picking stocks and their inherent risks. Bravo on bringing this investment vehicle to the fore.

May 1, 2008 | Unregistered CommenterWRA

How are these EFT's structured? Are they as partnerships, corporate entities or what? And since they obviously trade in paper, not taking delivery of gold, the risk is one of huge tax exposure come end of year accounting. What are your answers on these points, as these issues do affect one's considerations as the suitability of such vehilces.


May 1, 2008 | Unregistered CommenterRoger


Yes we plan to cover these ETF in more depth in a future article, please stay tuned.


I'm afraid we cannot give tax advice as we are not qualified in that area, nor do we know details of your personal financial situation. We suggest that you talk to your accountant or another qualified person about this issue.

Couraggio & Charlie,

Some ETF's that we have been looking at include:

(Public, TSE:HBD)
(Public, NYSE:DZZ)

(Public, NYSE:DGP)
(Public, TSE:HBU


We agree and are pleased to see these new products finally on the market.


Each ETF has a unique structure so you would need to look into the details of each one individually to find out how mechanics of how they work.
We are sorry but we cannot comment on individual taxation questions, we suggest you talk to your accountant or other trusted advisor.

May 2, 2008 | Unregistered CommenterGold Prices

Do these leveraged ETFs actually work AS EXPECTED is the question. For example FXP is supposed to be short 200% the FTSE/Xinhua China 25, but in reality while it does that on a daily basis, over a longer time horizon it doesn't necessarily do that. An easy comparison on yahoo chart could easily show that for a certain period, while the index is down by 10%, FXP actually also went down instead of up by 20% as expected.

So guys at pls be aware of this.

May 2, 2008 | Unregistered Commenterlewis

The reason I raised the issue of tax implications of commodity ETFs is the article at:
It cites the horror stories of investors with Duetsche Bank receiving shocks when K-1 forms were mailed to them stating profits earned as partners in their funds. Scroll down to the part entitled: "ETF Talk: Avoid the Tax Trap of Commodity ETFs".

May 2, 2008 | Unregistered CommenterRoger

Thanks for the great reading, we buy in a recession. I will pass this on to our Ira clients to read.

November 2, 2009 | Unregistered Commentergoldcoinsgain

VHGI 3rd Quarter 10Q shows positive income; Gold Strategy

December 20, 2009 | Unregistered CommenterJC2811

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