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Trading Gold and Silver ETFs for fun and profitPeter Degraaf Gold, silver, oil, copper, nickel, natural gas, grains and cattle ETFs are all available, and a number of ETFs cover a mixture of similar commodities. Commodity ETFs are a hotly debated issue, as people wonder if the assets that back the ETF, especially in the case of gold and silver, are really there, or if they are simply a commitment by a third party. For those of you who worry about that, it behooves you to read the prospectus and to contact the company that administers the ETF. Find out what auditing procedures are in place. In view of the fact that ETFs are here to stay, it is my contention that ETFs can be very useful, especially for active traders. In the case of precious metals ETFs, my advice to those of you who trade them, is to take profits every now and then, and turn those profits into physical metal. This is the strategy I use, and it serves me very well. I try to buy the ETFs during pull-backs in price, sell them when I sense they are temporarily overpriced, and convert the profits into physical gold and silver. In any event, I do not consider a precious metals ETF to be a long term investment. For long term investment I recommend buying physical gold and silver bullion. Almost every day I receive E-mails from subscribers, who lament the fact that some of their mining stocks are languishing, - mired as in quicksand. This next chart illustrates their dilemma. Charts courtesy www.stockcharts.com  Featured is the chart that compares the HUI index of gold and silver stocks to the gold price. The black arrow points to the trend, which indicates that for over two years, the gold price has outperformed the gold and silver stocks that comprise the HUI index. While many explanations have been offered, including declining ore grades, a lack of large sized discoveries and the increasing cost of production, I believe the main reason for this down-trend is the "ETF effect." The two most popular gold and silver ETFs are the GLD and SLV. The GLD ETF has absorbed 21 billion dollars of investment capital, while SLV has 3 billion dollars invested in silver bullion. This is 24 billion dollars of capital that would very likely have gone into mining stocks, if there were no ETFs. Think of the effect 24 billion dollars invested in the mining sector would have. While I agree with analysts who say that some mining stocks, especially junior exploration companies with proven assets (43-101 compliant), are now underpriced, nevertheless 'a trend in motion remains in motion until it is stopped.' The above chart shows no signs yet of reversing. Thus, until we see a trend change, we must expect the present trend to prevail. *** Here is another chart that shows the same trend.  Featured is the chart that compares the CDNX venture index (this index keeps track of exploration companies that trade in Toronto), to the gold price. The trend is not just down, but down sharply. The black arrow points to the longer term trend, the red arrows to the immediate trend. It is usually 'darkest just before dawn', and thus we could soon see a reversal of this trend, but until we do, it behooves us to 'ride the winning horses.' I have some junior explorers in my own portfolio, and I am simply not interested in dumping them at a loss. Instead I am having fun (hence the title of this article), trading ETFs, and turning the profits of those ETF trades into bullion, while I wait for the junior explorers to awaken. Tracking the ETFs is also a useful exercise in order to stay abreast of the trend in a particular sector, as ETFs are very 'trend-sensitive'. People who trade agricultural commodities or who are involved in farming might find agri-ETFs useful to help them determine the ongoing trend. Following is a partial listing, in alphabetical order, of commodity ETFs. To find out more details about a particular ETF, visit Google and type in the symbol followed by ETF, (thus "GLD ETF"). Included in this listing are
also various ETNs and Trusts, that perform similar functions
and they all trade similar to stocks. (ETNs are taxed at a different
rate than ETFs). I also recommend that you consider visiting www.etftrends.com and register for their E-mail updates. This website is a must for ETF information. CEF Central Gold Fund. holds
50 ozs of silver for every 1 oz of gold. ETFs are also useful for comparing different sectors. If you want to know if gold is outperforming gold stocks, just visit www.stockcharts.com and type GLD:GDX in the box at top right, as shown in this chart.  Featured is the chart that compares the GLD (gold bullion ETF), to the GDX (gold mining stocks ETF). While the 2 year trend favors the GLD, you can use a strategy of buying the GLD at the bottom support line, and the GDX at the top of the channel, thereby benefiting from the trend. If and when gold stocks begin to outperform bullion, you will find yourself staying longer with the GDX. This method of trading does not provide specific entry points, but it does offer a solid choice, once a decision to buy has been made. Summary: ETFs and ETNs serve a useful purpose for active traders. They can be expected to grow in popularity. They should not take the place of your core holdings of valuable commodities. I welcome your input, in case I have missed a commodity ETF or ETN, as well as appreciate suggestions for follow-up articles on this subject. Mar 17, 2008 Peter Degraaf is an on-line stock trader with over 50 years of investing experience. He sends a weekly Email alert to his subscribers. To benefit from a 60 day free trial, contact him at ITISWELL@COGECO.NET or visit his website: www.pdegraaf.com Disclaimer: Please do your own due diligence. I am NOT responsible for your trading decisions. 321gold Ltd |
