Gold Fund: What It is, How It Works, Example

What Is a Gold Fund?

A gold fund is a type of investment fund that holds assets related to gold. The two most common types of gold funds are those holding physical gold bullion, gold futures contracts, or gold mining companies.

Gold funds are popular investment vehicles among investors who wish to hedge against perceived inflation risks. They are also frequently held by so-called "gold bugs"—investors who are particularly bullish on the prospects of goal.

Understanding Gold Funds

Gold funds are pooled investment vehicles which often take the form of mutual funds or exchange-traded funds (ETFs). In the case of mutual funds, the gold fund may be accessible through a financial institution such as a commercial bank, whereas ETFs can be bought directly on the stock exchange. In either case, gold funds offer investors a convenient way to gain exposure to gold without incurring the relatively high storage and insurance costs associated with directly owning physical gold bullion.

Depending on the type of gold fund selected, a variety of investment objectives can be accommodated. To begin with, an investor might wish to purchase a gold fund holding gold bullion or gold futures as a way to hedge against the risk that their purchasing power might be eroded by inflation. This is a common concern among gold investors, who often feel that factors such as expansionary monetary policy, high levels of government borrowing, and chronic trade deficits could cause the value of the U.S. dollar (USD) to decline over the medium to long term. For these investors, owning a gold fund could help counterbalance any potential decline in the USD, based on the premise that investors will turn to gold as a safe haven if the dollar begins to fall.

For other investors, gold funds may be attractive less as an inflation hedge and more as a pure investment in gold-producing companies. These types of investments can be quite attractive for investors who believe gold prices are likely to rise. After all, the cost of equipment, personnel, and other fixed costs borne by mining companies remains fairly static regardless of the price of gold, which means that if the price of gold does rise significantly, this could have a substantial positive effect on gold mining companies' profit margins. For this reason, investing in a gold fund that specializes in gold mining companies can be an attractive way to profit from any potential appreciation in gold. Of course, the opposite is also true, in that a decline in gold prices could lead to rapid declines in gold mining companies' profit margins.

Real World Example of a Gold Fund

Investors interested in increasing their exposure to gold have many options to choose from. For example, a popular gold fund that invests directly in gold futures contracts is the SPDR Gold Trust (GLD). For those wishing to invest in gold mining companies, a popular option is the VanEck Vectors Gold Miners ETF (GDX). In both cases, however, there are many more gold funds to choose from.

Some funds focus on other aspects of gold as an asset by investing in mining companies. The Vanguard Global Capital Cycles Fund (VGPMX) mutual fund spreads a portion of its investments in precious metal and mining companies by holding U.S. and foreign securities.