Gold Prices Indicate Investors Shouldn't be Afraid of Commodity ETFs

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It seems the gold rush is slowly working its way up again.

With an already weak dollar, QE2 around the corner and the price of gold at around $1350 per ounce”and few signs of letting up”certain market watchers and product providers are pointing to these factors as the main reason to invest in gold and other precious-metal securities.

Indeed, if QE2 goes through, many analysts say that gold prices will spike sharply.

One of the liveliest (and certainly lesser-known, at least in some U.S. markets) ways to invest in precious metals is with commodity ETFs. Now, one of the world’s leading promoters and issuers of these funds, ETF Securities (ETFS), is making a run on U.S. markets. More on ETFS’s performance can be found here.

On Nov. 2, at a precious metals briefing in Chicago, ETFS made their bid to prove to Chicago investors the global importance and potential value of investing in precious metals “baskets”bundles of precious metals securities”in this economy.

“At $1300 an ounce, is the price of gold really expensive? No, it’s not! said David Hightower, president and co-founder of The Hightower Report and a speaker at the briefing. “Just shows that times are changing.

In his view, gold’s market price should match the cost of production. By inducing another round of quantitative easing, Hightower later said, the Fed is extending the gold market for the future.

But what do commodity ETFs mean for metals buyers? In terms of gold and silver, probably not much. However, as far as platinum and palladium prices go”and even more importantly, base metals such as copper and aluminum”key developments are on the horizon.

After already introducing physically backed gold ETFs in the U.S. (traded on NYSE Arca), ETFS is set to introduce base metals baskets soon. When MetalMiner asked Nicholas Brooks, Head of Investment Research and Strategy at ETFS, when to expect an announcement on physically-backed base metal baskets, he kept mum.

As we look to watch metals such as copper and aluminum trade on ETFs, the biggest concern is when, not if, inflation will hit. The implications for buyers may be huge.

With Bernanke playing with QE fire the second time this decade, folks such as Hightower see no way around it. “In my 30 years of experience, he said, “I have not seen such a loaded macroeconomic setup for inflation, and politicians think they can stop this.

Regardless, it behooves investors and metals buyers to be educated on commodity ETFs so that they not only are aware of the risks, but of the potential rewards. Firms such as ETF Securities want to spread the word to buyers that the terms “commodity and “ETF, when used side-by-side, will no longer sound as opposite as oil and water.

–Taras Berezowsky

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