ETFs for Precious Metals: A Beginner’s Guide to Investing in Gold & Silver – Goldminr

Are you looking to diversify your investment portfolio and hedge against economic uncertainty? Precious metals, like gold and silver, have long been considered safe-haven assets. Exchange-Traded Funds (ETFs) offer a convenient and accessible way to invest in these metals without the complexities of physical ownership. In 2024, the global precious metal market was valued at USD 283.40 billion, and is projected to reach USD 545.57 billion by 2034, expanding at a CAGR of 6.77% from 2025 to 2034. This guide will walk you through the basics of precious metals ETFs, helping you make informed decisions about adding them to your investment strategy.

What are Precious Metals ETFs?

Precious metals ETFs are investment funds that hold assets like gold, silver, platinum, and palladium. They trade on stock exchanges, just like individual stocks, making them easy to buy and sell. When you invest in a precious metals ETF, you’re gaining exposure to the price movements of these metals without the need to physically own, store, and insure them.

How Do Precious Metals ETFs Work?

Precious metals ETFs function by pooling capital from multiple investors to purchase precious metals or related assets. Here’s a breakdown of the key players and processes:

The Sponsor: The company that creates, promotes, and manages the ETF.
Market Makers: These companies ensure there’s consistent supply and demand for the ETF shares, guaranteeing liquidity.
Authorized Participants: These entities create and redeem ETF shares in large blocks, helping to keep the ETF’s price in line with the underlying asset’s value.

The ETF’s price is directly linked to the price of the underlying metal. For example, if the price of gold increases by 1%, the value of a gold ETF should also increase by approximately 1%.

Types of Precious Metals ETFs

There are primarily three types of precious metals ETFs:

Physical Metal ETFs: These ETFs hold physical bars of the precious metal in secure vaults. They offer direct exposure to the metal’s spot price. Examples include SPDR Gold Shares (GLD) and iShares Silver Trust (SLV).
Mining Company ETFs: These ETFs invest in the stocks of companies involved in precious metal mining. They offer exposure to the precious metals market, but their performance can be influenced by factors beyond metal prices, such as operational and management issues. An example is the VanEck Gold Miners ETF (GDX).
Futures-Based ETFs: These ETFs use futures contracts to track the price of the metal. They don’t hold physical metal and can be subject to unique risks, such as contango, where futures prices are higher than spot prices, potentially eroding returns.

Benefits of Investing in Precious Metals ETFs

Diversification: Precious metals have a low correlation with other asset classes like stocks and bonds, making them a good way to diversify your portfolio and reduce overall risk.
Hedge Against Inflation and Economic Turmoil: Precious metals tend to maintain their value during periods of inflation and economic uncertainty, acting as a safe-haven asset.
Liquidity: ETFs trade on stock exchanges, making them highly liquid. You can easily buy and sell shares during market hours.
Accessibility: Investing in precious metals ETFs is accessible to a wide range of investors, including individuals, institutions, and retail investors.
No Storage Hassles: You don’t need to worry about storing and securing physical metals. The ETF provider takes care of storage and handling.
Cost-Effectiveness: Precious metals ETFs typically have lower expense ratios compared to actively managed mutual funds.

Risks and Limitations of Precious Metals ETFs

Market Volatility: The prices of precious metals and the ETFs that track them can be volatile, responding to economic and market conditions.
Tracking Error: An ETF’s performance may not perfectly match the price changes of the underlying asset due to management inefficiencies or market disruptions.
Counterparty Risk: Precious metals ETFs also involve counterparty risk. If the fund’s management or the institutions backing the ETF face instability or financial issues, it could impact your investment value and potential returns.
Tax Implications: Precious metals ETFs are often taxed as collectibles, subjecting gains to higher tax rates (up to 28% for long-term holdings) than standard capital gains rates.
No Ownership: Unlike owning physical gold, gold ETFs provide exposure to gold prices without granting actual ownership.

Factors to Consider When Choosing a Precious Metals ETF

Expense Ratio: Compare the expense ratios of different ETFs. This is the annual fee charged to cover the fund’s operating costs.
Liquidity: Check the average daily trading volume to ensure it’s easy to enter and exit positions.
Tracking Error: Review the ETF’s tracking error to see how closely its performance matches the underlying asset’s price changes.
Investment Strategy: Understand the fund’s aims, including whether it’s backed by physical assets or derivatives, and the investment strategy it follows.
Type of Metal: Decide whether you want exposure to a single metal (gold or silver) or a basket of metals (gold, silver, platinum, and palladium).

Top Precious Metals ETFs

Here are some of the top precious metals ETFs available:

SPDR Gold Shares (GLD): The largest gold ETF, holding physical gold bullion.
iShares Silver Trust (SLV): The largest silver ETF, holding physical silver.
abrdn Standard Physical Platinum Shares ETF (PPLT): An ETF that holds physical platinum.
abrdn Standard Physical Precious Metals Basket Shares ETF (GLTR): An ETF that holds physical gold, silver, platinum, and palladium.

Tax Implications of Precious Metals ETFs

The tax implications of precious metals ETFs can be complex. Here’s a general overview:

Physical Metal ETFs: These are often taxed as collectibles, with long-term capital gains subject to a maximum federal income tax rate of 28%.
Mining Company ETFs: These are typically taxed as standard securities, with long-term capital gains subject to a maximum federal income tax rate of 20%.
Futures-Based ETFs: Gains from these ETFs are often taxed as 60% long-term capital gains and 40% short-term capital gains, regardless of how long the ETF was held.

It’s essential to consult with a tax professional to understand the specific tax implications of your precious metals ETF investments.

The Outlook for Precious Metals

Analysts at JP Morgan expect gold prices to reach $3,675/oz by Q4 2025 and rise to $4,000 by mid-2026. Several factors are likely to boost the demand for bullion, including:

Ongoing economic and geopolitical uncertainties and high inflation levels are expected push traders to invest in safe havens like gold that tend to remain resilient.
An increase in jewelry demand tends to boost demand for gold.
Continued increase in gold purchases by central banks, especially the People’s Bank of China.

Is Investing in Precious Metals ETFs Right for You?

Investing in precious metals ETFs can be a valuable strategy for diversifying your portfolio and hedging against economic uncertainty. However, it’s essential to understand the different types of ETFs, their risks and limitations, and the tax implications before investing.

By carefully considering your investment objectives, risk tolerance, and time horizon, you can determine whether precious metals ETFs are a suitable addition to your investment portfolio.