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When you invest in a gold ETF, you are buying shares of the trust. The share price tracks closely to the current spot price of gold.

The advantage of gold ETFs is that you get direct exposure to gold's price movements without dealing with buying, storing, and insuring physical gold yourself.

In this article, we'll look at the five long-term investment strategies that can optimize your success when trading gold ETFs.

 

1. Dollar Cost Averaging into Gold ETFs

Dollar-cost averaging involves making consistent investments at set intervals over an extended period. You invest the same dollar amount each time, regardless of price fluctuations.

This long-term investment strategy allows you to gradually build exposure at a lower average cost per share. By sticking to a schedule, you avoid investing all your capital at potentially the worst timing.

Dollar-cost averaging is one of the most straightforward and powerful long-term investment strategies. It helps overcome the challenge of deciding when to invest in gold ETFs.

To implement this strategy, decide on a monthly dollar amount you want to invest. Many brokerages allow you to set up automatic recurring buys, so the gold ETF purchases happen consistently without any extra effort on your part.

For example, you might invest $500 into a gold ETF on the 1st of each month. In months when the price dips, your $500 will purchase more shares. When gold prices rise, you'll get fewer shares for your $500. But over time, the average cost evens out.

 

2. Use Gold ETFs as a Portfolio Diversification Tool

Investment advisors recommend diversifying your portfolio across different asset classes that aren't highly correlated. Most portfolios are built on exposure to stocks and bonds. Adding a gold allocation helps provide even more diversification.

Gold often moves independently from various financial assets. It can provide portfolio protection during stock market crashes or times of geopolitical upheaval when fear rises. Having 3-10% of your total portfolio invested in gold ETFs can act as a hedge.

Rebalance your portfolio back to your target gold allocation at least once a year. If gold has appreciated substantially, take some profits off the table and reallocate a portion back to stocks and bonds. This prevents your gold exposure from becoming too large a proportion of your total portfolio.

Maintaining a modest but consistent allocation to gold via ETFs will smooth out your returns over long periods. Gold acts as a ballast, providing stability when stocks and bonds are declining.

 

Take a look at this article: Index Rebalancing - Why Do Indices Get Rebalanced?

 

3. Invest in Gold Mining ETFs

 

Gold bars neatly stacked with a trading chart in the backdrop

 

If you want more leverage to gold's upside potential, consider investing in ETFs focused on gold mining stocks only. Shares of gold mining companies provide leveraged exposure to moves in the price of gold.

Mining companies' profit margins expand when gold costs rise since their costs remain relatively fixed. The mining stocks often outperform the percentage gain of gold prices.

For example, the VanEck Vectors Gold Miners ETF (GDX) gained 54% in 2016 compared to 9% for the SPDR Gold Shares ETF (GLD) directly tied to gold bullion. In periods when gold declines, the opposite effect takes place, and mining shares fall faster than gold prices.

To dampen the volatility, you can pair mining company ETFs with gold bullion ETFs like GLD or IAU. This provides exposure to both the physical gold price and the operational leverage of mining firms when prices rise.

Trading a portion of your gold ETF portfolio in the miners increases potential returns and extra risk during bull markets. Maintain an overall long-term outlook and be prepared to hold through inevitable corrections.

 

4. Generate Income via Covered Call Options

Savvy ETF investors can generate additional income from their gold ETF holdings through a long-term investment strategy known as covered call writing. This involves selling call options on your ETF shares.

Here is how it works:

  • You own shares of GLD, the SPDR Gold Shares ETF.
  • You sell call options that give the buyer the right to purchase your GLD shares at a specific price (the strike price) on a future date.
  • You collect the premium paid for the call options upfront. This is the income generated.
  • If GLD stays below the strike price, the options expire worthless, allowing you to keep owning the ETF and the premium.
  • If GLD rises above the strike price, the shares get called away (sold) at the strike price. You still keep the premium income but cap your upside on the position.

The risk with covered calls is that you may miss out on additional gains if gold rallies above the strike price. However, you can select strike prices that allow for a reasonable upside. The income from options premiums can boost total returns from your gold ETF investment over time.

 

You might also like to read: How Do You Trade Gold CFDs?

 

5. Time Entries and Exits

 

Man checking trading charts on a mobile device

 

While dollar cost averaging is a solid long-term investment strategy, it's wise to consider gold's short-term price trends when investing. No one can predict moves perfectly, but buying at relative lows and selling at relative highs improves results.

For example, look at gold's seasonal trading patterns. Gold often bottoms in the summer months between June and August. Accumulating positions during this period allows one to take advantage of the usually ensued late summer/early fall rally.

On the other hand, gold often peaks near February or March before sliding into summer. With long-term holdings, you may look to pare back some exposure during spring highs.

Beyond seasonality, it also helps to enter ETF positions when gold appears oversold technically. And trimming exposure when gold is overbought can lock in profits. Pay attention to trends in place and time new entries and exits accordingly.

 

Read this article for more insights: Stop Order, Limit Order and Trailing Stop - What You Need to Know

 

In Summary

Gold ETFs offer investors an efficient vehicle to gain exposure to gold's long-term investment benefits. Utilizing dollar cost averaging, diversification, currency hedging, and other strategic approaches can produce solid returns over extended periods.

Pay close attention to gold's role as an alternative asset and tailor your allocation and timing appropriately. Maintain reasonable return expectations, focusing on gold's attributes as a portfolio diversifier and store of value.

 

With prudent strategies, gold ETFs can provide long-term protection and profits.

 

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“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”

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