The easiest, though not necessarily the safest, way to take part in the precious metals market is to utilize the stock market and invest in an ETF (Exchange Traded Fund). An ETF is essentially a derivative because it derives its stock value based on the price of the underlying precious metal. For example, the biggest gold ETF is the SPDR GLD Trust (Ticker=GLD). The GLD ETF claims to hold a certain allocated amount of gold in a vault somewhere in London. It is this physical gold that would give value to each share of the GLD stock.

However, it would be preferable if the ETF in question would allow the stockholder to receive his/her gold upon request. According the the GLD prospectus if a certain stockholder has a Basket of 100,000 shares, they may act through an Authorized Participant to redeem their shares for physical gold. But most people aren’t wealthy enough to own that many GLD shares.

So what would happen if some unforeseen economic crisis caused such a stir that all those stockholders who are wealthy enough to have that many shares decided to redeem their Baskets? There is a very good chance that the value of the stock itself would crash because there isn’t enough gold supporting the outstanding shares – some shareholders would be left with shares that don’t have any supporting underlying metal. To see the reasons why this could happen, one only needs to investigate two things:

• First, look at the NAV (Net Asset Value) of a basket of GLD shares in terms of ounces of gold. From the perspectus:
  

  “The number of ounces of gold required to create a Basket or to be delivered upon the redemption of a Basket gradually decreases over time, due to the accrual of the Trust’s expenses and the sale of the Trust’s gold to pay the Trust’s expenses.”

  This means that as time goes by, even those wealthy enough to own 100,000 shares of GLD, will get less and less physical gold when they redeem them.

• Second, there is a huge amount of short interest in the GLD stock as can be seen here. At the time of this writing, the short interest is about 6%. And that represented 24,570,100 shares which had absolutely no metal backing up those shares. If this were a temporary occurance, one may forgive the situation as it would be necessary during the periodic volativity of trading activity to temporarily issue shares while the Trust’s sponsor accumulated the metal in the open physical market. But since this short situation is rather constantly above this percentage, it is not a temporary thing – indeed it is an aberration! There shouldn’t be naked short shares exceeding the neighborhood of 1% of the outstanding share base (and that’s even extreme for this kind of investment vehicle which attempts to map a certain amount of physical metal to each share).

The same situation results in an investigation of the largest silver ETF, iShares Silver Trust (Ticker=SLV).

There are, however, other ETFs which do offer better odds for the investor and have much more responsible trustees. Two that come to mind are the Sprott Physical Gold Trust (PHYS) and the Sprott Physical Silver Trust (PSLV). There are similar management overhead situations in both of these ETFs, but their short interest seem to be much more under control. (At the time of this writing the short interest was 0.05% and 1.4% respectively.)

More importantly, any shareholder who has enough PHYS shares to exchange for the equivalent cost of a 400 ounce good delivery bar can do so on a monthly basis:

So, that’s about 40,000 shares necessary for redemption in physical metal in PHYS versus 100,000 share Baskets via Authorized Participants in GLD.

It get’s better. There seems to be tax advantages PHYS & PSLV have over other ETFs:

But even these ETFs have potentially negative side-affects. It should be pointed out that not all analysts agree and here’s one article that disses PHYS.

If you just want to play the bull market by trading paper money and don’t expect to need the physical metal in the near future, then perhaps the ETF is a vehicle you can use to book profits. Just make sure you understand that the profits (or losses) will be in paper-based fiat currencies like the U.S. dollar. And as you should already know, all fiat currencies of the world are now racing to their nominal values (=zero). This article explains why that’s happening.

It’s just better and safer to own and hold your own physical metal in your hands. Especially if a catastrophe hits the global monetary system, as could happen given the situation with the dervatives market.

Contact the author of this article by sending an email to: Jon K

Investing in the mining sector in an attempt to profit from the bull market in precious metals can be successful for those investors who understand the industry. Others may come up on the lucky side simply due to the overwhelming price advances of gold and silver.

In past precious metal markets, the mining company stocks have tended to move in the same direction of the underlying metals, but their volativity have far surpassed that of the metals – sometimes causing exponential price fluctuations compared to the price changes in metals.

This is largely due to the fact that investments in miners are essentially investments in the stock market. Hence, they are vulnerable to anything affecting the general economy and can move in the opposite direction of the metals, depending on circumstances.

The mining stocks are particularly vulnerable to political climates and even environmentally-motivated uprisings in countries where the companies are mining. For example, Hugo Chavez announced that he is nationalizing Venezuela’s gold miners. And in Peru, after the latest round of elections, the newly elected president, Ollanta Humala, would definitely like to have a share of the miner industries’ profits in his country, but it isn’t clear if or how that may happen. Nevertheless, just the rumors of government intervention of any kind can send a stock down dramatically.

Between the threats of government intervention or increasing mining taxes and environmental concerns, one walks a tight rope in determining companies in which to invest.

On top of these factors, the investor must decide which market-cap range is the best area of investment.

• Large Cap (Market Capitalization in Billions of dollars & well established)
• Mid Cap (Market Capitalization in high Millions of dollars)
• Small Cap (Market Capitalization in low Millions or unestablished)

Large caps can be more stable, but not have much growth potential. In fact, most large caps depend on buying up small and mid caps in order to sustain growth. Some small caps can yield huge returns. But some are risky because they can run out of cash and go belly-up before any significant find is established. The trick is knowing which ones have the greatest potential.

So it is worth repeating…if the investor doesn’t know the industry, then perhaps a better label for the activity of investment would be gambling.

But there are knowledgeable people in the industry. And one way to take advantage of that knowledge is to invest in minor-related ETFs and Mutual Funds. These types of funds hold baskets of various stocks, chosen by the funds’ management.

Below is a table of some precious metal equities, but it should be noted that these are not recommendations – each investor should initiate his/her own investigations prior to making any investments. The table is provided for informational purposes only.

Disclaimer: The author either owns, has owned, or is contemplating owning the listings in this table.

Large Caps
AEM	Stock – AgniCo Eagle Mines Ltd
EGO	Stock – Eldorado Gold Corp
GG	Stock – Goldcorp
KGC	Stock – Kinross Gold Corp
PAAS	Stock – Pan American Silver Corp
SLW	Stock – Silver Wheaton Corp
SVM	Stock – Silvercorp Metals Inc
AUY	Stock – Yamana Gold Inc
TGLDX	Mutual Fund – Tocqueville Gold
USERX	Mutual Fund – U.S. Global Investors Gold & Precious Metals
UNWPX	Mutual Fund – U.S. Global Investors World Precious Minerals
GDX	ETF – Market Vectors Gold Miners
Mid & Small Caps
CA:AMM	Stock – Almaden Minerals Ltd
CA:BYV	Stock – Bayfield Ventures Corp
CA:CGT	Stock – Columbus Gold Corp
CA:EAS	Stock – East Asia Minerals
FSM	Stock – Fortuna Silver Mines
THM	Stock – International Tower Hill Mines Ltd
CA:TWD	Stock – Trade Winds Ventures Inc
XRA	Stock – Exeter Resource Corp
AG	Stock – First Majestic
GDXJ	ETF – Market Vectors Junior Gold Miners

But the relative ease and convenience of an ETF doesn’t necessarily mean they are safe investments. In fact, quite the opposite – they can be quite volatile. And since they are a derivative of the underlying asset or financial instruments, every investor should understand that the ETF does not yeild any ownership of anything but a share of stock. (It is not as if the underlying asset or financial instruments are being purchased.) At best, any ETF can only propose to have similar price-performance compared to the underlying instrument.

While it is true that some ETFs provide for the exchange of stock shares for the underlying assets, this option is closed to most investors simply due to the minimum number of shares necessary to execute such an option.

Any investor wishing to participate in the precious metals bull market by utilizing the ETF arena should understand that it is not the same thing as owning precious metals. Instead, it’s a paper asset and should be treated as such. It should also be realized that all ETFs are not managed the same, nor are they even structured the same. On top of that, given any specific ETF, there will always be varying opinions among different analysts regarding the validity and expected performance of that same ETF. As an example, here’s an article discussing and comparing some of the prospects of the GLD, SLV, PHYS and PSLV ETFs.

When it comes to ETFs based on precious metals, there are a variety of different types:

• Standard ‘bull’ ETFs linking the price of one share to the price of a specific amount of a precious metal. The price of the shares tend to move more or less in synch with the underlying metal’s price movements.
• Standard ‘bear’ ETFs also linking the price of one share to the price of a specific amount of a precious metal. Only the share price tends to move in the opposite direction of the metal. (The share price goes up if the price of the underlying metal goes down.)
• Leveraged ETFs seek to give double (or sometimes triple) exposure to share price movements of twice (or more) the amount of the underlying metal. Again, these can be either bull or bear type exposure. (Incidentally, these leveraged ETFs are becoming quite a concern to market regulators in Washington. A derivative of a derivative of the underlying asset doesn’t seem so friendly to free markets. This related article discusses the dangers of the derivatives market.)

Below are some of the more popular ETFs in the precious metals space. Please note that this list is not comprehensive and these are not recommendations, but provided for informational purposes only.

There are a few different ways to invest in precious metals. Each investor needs to give serious thought to these ideas and select the option(s) that best suit their own needs.

Below is a quick reference to different investment vehicles available to the average investor interested in the precious metals market.

Investment Vehicle	Description
Physical Metal	Buying physical precious metals requires the investor to take delivery of their gold and/or silver bullion in coin or bar form. This also requires self-storage (using either a home-safe or a bank safety-deposit box). Every serious precious metals investor should have at least some percentage of their entire investment portfolio in this form of physical ownership.
Online Storage	The world wide web makes it possible to do online investing as well as purchase and remotely store precious metals. For those investors that are unable to personally store their metal, this option can be extremely convenient. With the added benefits of having global access to storage facilities in the U.S., Europe and Asia, this option can also build in geographical diversification – always a good thing in today’s political climates.
ETFs	There are Exchange Traded Funds (ETF) which trade just like stocks in the stock market. These are by far the most convenient, but also perhaps a bit more volatile than the actual physical market itself. This method of investing should not truly be considered an investment in the physical metal, since delivery of the metal would be difficult for most investors.
Mining Companies	If you’re ultra-wealthy and you want to preserve that wealth, it can be extremely difficult to acquire all the physical metal your money can buy. This is mostly because hitting the market with huge buy orders can make the price spike up and upset the market. For this reason, the elite classes usually buy up their own mining companies. The smaller investor can still participate via publicly offered shares in large, mid and small-cap mining companies listed on stock-exchanges.