Is Now the Time to Bet on Gold ETFs?

"Fire is the test of gold; adversity, of strong men," the Roman philosopher
Seneca once said. With volatile financial markets serving up heaping portions of
adversity, gold remains a time-tested hedge against declining stocks and a weak
dollar. So in the interest of a well-diversified portfolio, it never hurts to
hold some of the shiny yellow metal. The truest test of gold's investment
value is cast in the crucible of global economic mayhem. Gold prices might have
backtracked in September, but they're still up nearly 40% since last year.
Why? A weak dollar and persistent fears that the European sovereign debt crisis
will ignite rampant inflation is giving the metal its second wind. Gold prices
reached almost $1,700 per ounce this week on concerns that U.S. and euro zone
leaders can't or won't make tough spending cuts to reduce government debt
and deficits. If you believe in the "why" part of gold's value
proposition, the next question is how. Investors have a few options here:
physical gold (bullion or coins), bank-issued gold certificates, derivative
instruments like gold futures, gold mining and exploration stocks and
exchange-traded funds. While many goldbugs prefer bullion or coins for the high
liquidity (or because they like the feel of that precious metal in their hands),
some investors balk at the physical storage and security hassles. Bank-issued
gold certificates often are based on unallocated gold if the bank fails, your
interest is a share of its liquidated assets, not a specific bar of gold. Gold
futures contracts can be a windfall for speculators, but their complexity makes
them a nonstarter for most conservative investors particularly those at or near
retirement age. Mining and exploration stocks might be solid investments
depending on their fundamentals, but it's an indirect gold play compared to
other choices. For those reasons, products like ETFs (which like equities are
traded through exchanges) are a good way to play the gold market. As with any
investment, there are pros and cons to buying into an ETF.