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What Are Gold Securities?

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  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 25 September 2016
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Gold securities are usually divided into one of three major categories: gold bonds, gold exchange traded funds, and gold mutual funds. All three are financial instruments tied to the market value of gold, and often other precious metals as well, with the exception that gold bonds are directly backed by gold bullion reserves. It is also possible to invest in gold as a security by physically buying and selling gold based on its value on commodities exchanges.

Throughout history, many people have seen gold investments as a way of protecting their financial assets against catastrophes such as political or economic instability, inflation and currency fluctuations, and the risk inherent in the stock market. Where gold securities are involved, however, this becomes a gray area because exchange-traded funds follow market trends and mutual funds attempt to beat the market through diversity, but can often fall short of that goal. The international breakdown of the gold standard in 1971, when US president Richard Nixon ended the policy of US paper money being directly convertible to an equal value of gold, also contributes to speculation in gold securities.

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Bonds tied to gold, or gold-convertible bonds, are issued by mining firms that directly back the bonds by stores of gold that they hold. Gold bonds give the investor the option of converting his or her bonds to gold at any time, without having to physically store and insure the gold metal itself. This makes them highly liquid financial instruments that track the commodity price of gold, and are conveniently convertible to gold or cash. The downside to gold bonds as one of the major forms of gold securities is that, if the price of gold on the market falls, then the bonds are worth less, and they are usually tied to one mining company, which can change its policies. If the mining of gold becomes more expensive than current gold prices, then the value of the bonds will also begin to fall.

Exchange-traded funds as a form of gold securities are similar to bonds in that they are fully backed by gold bullion that is securely deposited and insured. These funds, however, are designed to follow market trends. Regional gold markets, such as the Australian gold market with its Gold Bullion Securities fund, will fluctuate compared to gold prices elsewhere and rise and fall with the market.

Mutual funds tied to gold are no doubt the most speculative types of gold securities for someone who chooses to invest in this precious metal. A mutual fund is a collection of stocks, bonds, and short-term investments that a management team runs to try to secure financial gains beyond overall market trends. The net asset value (NAV) of mutual fund shares is calculated on a daily basis, and, in the case of gold mutual funds, investments are centered on various precious metals such as gold, silver, and platinum. The idea is to balance losing investments in the fund with those gaining ground in order to have an overall positive return. Estimates suggest, however, that, as a general category, only about 1-30% of all mutual funds beat the market average in a statistically significant way, and, as they grow larger, their success tends to degrade.

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