investing in gold / oil through ETF/ETC

bargainhunter888

Can someone explain whether investing in gold / oil through an ETC is just the same as an equity?

ie if I purchased PHGP or SGLD ETC should the price go up, I sell and i get the increase?
When i searched for certain funds, some of them are listed as sophisticated and for the advanced investor only, am i missing something?
looking on the KIID of the 2 funds above, they suggest holding for 5 years and that the investment could go down as well as up, but it gives examples of scenarios where the investors lose money based on an investment of 10,000 etc .

could someone demystify this? i assume it could apply to purchasing Oil as a commodity? given the cost per barrels is all time low, the logical thought would be this will rise within the 20 year horizon and be a good investment?
Thanks 

Username999

bargainhunter888 said:

given the cost per barrels is all time low, the logical thought would be this will rise within the 20 year horizon and be a good investment?
 

Crude Oil is not at an all time low.
WTI Crude could go below $10 in the near term.
Some would like to see Crude Oil disappear all together within 20 years.
Is it a good investment? IMHO yes, but pick your 'Oil Investment' instrument with care.

bowlhead99

bargainhunter888 said:

Can someone explain whether investing in gold / oil through an ETC is just the same as an equity?

ie if I purchased PHGP or SGLD ETC should the price go up, I sell and i get the increase?

Yes you can buy it on a stock market just like an equity, and if you buy it and it goes up in value and you are able to sell it before it falls in value, you will make money. But structure-wise it's not quite 'just the same as an equity'; PHGP is a type of debt security backed with physical gold as collateral. More on that on my link below.

When i searched for certain funds, some of them are listed as sophisticated and for the advanced investor only, am i missing something?

Probably. The key information document for PHGP starts "You are about to purchase a product that is not simple and may be difficult to understand".

If you have read the relevant pages of the 198-page prospectus and it sounds simple to you: 'I buy it and it goes up in value and if I can sell it before it falls in value, I will make money' you are perhaps looking at it too simplistically. 

looking on the KIID of the 2 funds above, they suggest holding for 5 years and that the investment could go down as well as up, but it gives examples of scenarios where the investors lose money based on an investment of 10,000 etc .
could someone demystify this? 

Most investments will recommend a minimum hold period of at least 5 years because very short-term returns can essentially be random. The financial regulator tells people to give examples of returns under various scenarios, including a favourable scenario where it goes up in value, a normal scenario where a commodity doesn't go up in value and you lose money to costs, and an unfavourable or market stressed scenario where you do worse than you might hope.  As they say in the document, the scenarios are only examples of some of the outcomes that could occur, based on recent actual returns, whereas your personal actual returns could be worse.

For PHGP, the 'stressed' scenario of losing about 12% every year (or about half your money over five years) is quite possible in extreme market circumstances, and they are clear in the footnotes to the table that it's not really a worst-case-scenario - for example it is just designed to show what might happen to your return if the market for the underlying commodity is bad, but it doesn't take into account the risk that they can't pay you out because something has gone very wrong with the product. 

In another thread a couple of weeks back, I gave some comments about ETFs and ETCs when someone was asking about a couple of specific stockmarket-listed gold investment vehicles. You might find it useful if you are trying to learn more about how such investments work in general:
https://forums.moneysavingexpert.com/discussion/comment/76986231#Comment_76986231

bargainhunter888

Sorry mate, still clear as mud, I gathered etf and etc in gold are different vehicles? But the threads go on about storage costs and redemption and whether the etf company actually has the gold has got me confused.
in simple terms is there an etf that I can buy and sell freely like an equity that there are no other hidden costs other than the ongoing charges? So if I buy now it cost £100 and tomorrow it’s £200, I make £100 profit less the dealing charges? 

Same with oil 
thanks 

bowlhead99

bargainhunter888 said:

Sorry mate, still clear as mud, I gathered etf and etc in gold are different vehicles? But the threads go on about storage costs and redemption and whether the etf company actually has the gold has got me confused.

Yes, exchange traded funds that own gold are different from exchange traded commodity certificates which represent a collateralized obligation for gold held on your behalf, though both should go up in value when the market value of gold goes up. They are listed as sophisticated vehicles for the advanced investor, because they are complicated investment vehicles with risks that are not always apparent. A number of the most important risks are set out in a long and complex prospectus. 

in simple terms is there an etf that I can buy and sell freely like an equity that there are no other hidden costs other than the ongoing charges? So if I buy now it cost £100 and tomorrow it’s £200, I make £100 profit less the dealing charges? 
Same with oil 
thanks 

Generally, yes that's how it works with all ETFs and ETCs unless they are leveraged or hedged (adding to the risk and complexity).

The ongoing charges are shown in the factsheet and when you are researching the products you can compare the performance of the ETF/ETC over time with the changes in the price of gold or oil to see how well the value has been tracked. Any costs or differences not picked up in the expense ratio or ongoing charges figure will be evident as 'tracking error'.

Other than that, and the spread between quoted buying prices and selling prices, you are right that if you buy it and the commodity doubles in value, your exchange traded fund share or electronic debt certificate will double in value, and then assuming there is sufficient liquidity, you will be able to sell your share or certificate to someone else on the stock exchange for a higher price than you paid. Unless the investment vehicle fails due to some structural point of failure which didn't seem likely but will generally have been warned about in the long and complex prospectus.

You asked earlier if you were missing something when you saw that the products carried warnings that they were for sophisticated investors who understand the risks. The issue is that generally that shares or notes issued by the investment vehicles - if they are large and liquid - will track the price of the underlying commodity very well: allowing you to make money if the value of the commodity goes up, and lose money if the value of the commodity goes down. Unless they go wrong, and so you should understand how and why they could go wrong before you invest. No ETF or ETC is risk-free.

So although yes there are ETFs or ETCs that you can 'buy and sell freely like an equity that there are no other hidden costs other than the ongoing charges' (and tracking error), but we couldn't recommend any of them as being risk-free because all ETFs and ETCs carry risk other than the pure market risk of the changing price of the underlying commodity. You have to understand and be comfortable with all the potential risks that exist, most of which will be covered in the prospectus. 

If you are not a sophisticated investor and don't want to do too much research, the products are probably not for you, but that doesn't stop unsophisticated investors buying them, because anyone can always tick the box that says they have received and read the fund documents at the time they're buying it, even if they are lying and can't read or don't understand what they read. If you buy it and the value you can later sell it for in pounds has gone down more than the price of gold or oil in pounds, there is no UK consumer protection. In that respect, it's just like buying equities - the company behind it, or one of the counterparties to its contracts, might fail, causing you unexpected problems.

If you don't like the idea of those difficult-to-quantify risks, you could just buy actual physical gold or oil. In that respect, buying and storing gold is much easier than buying and storing barrels of oil for physical delivery. If you buy individual blocks of gold that you hold and store yourself, there is quite a large spread between buying and selling prices compared to the usual levels of bid/offer spread on ETFs, and you won't be able to put them in your ISA or pension accounts - though you won't really need an income tax or CGT wrapper because gold doesn't produce any income and certain types of UK gold are exempt from CGT.

EdGasketTheSecond

Hi mate. You just trade gold and oil ETFs like any other share; buy one day and sell the next if you want. I have been doing it for years. Your broker/platform will most likely make you complete a 'complex instruments' form to allow you to buy and sell these ETFs. However there is basically nothing complex about them; you are just buying a share of an investment in gold or oil. The 'complex' bit is about the ETF structure and in practice would only be a risk in a severe market meltdown where one or other bank involved cannot meet their obligations. I'd say for 99% or more of the time it would not be a problem but legally they have to make you aware of the structure risks.

For Gold you don't want to be using SGLD because you'd have to change GBP to USD and have a currency charge. Instead use the GBP traded code SGLP.  Just use any ETF backed by physical gold, not derivatives. For UK investors these are:

SGLP

SGLN

PHGP

GBSS

SGBX

WisdomTree do oil ETFs though they are not really my thing so I have not used them.

EdGasketTheSecond

PS The oil ETFs won't be backed by physical oil like the gold ones are backed by physical gold. Instead they are only backed by 'paper' swap contracts and hence carry a greater risk of default although normally that risk is small.

oz0707

I tried to buy an oil fund the other week on my halifax share dealing account. It asked me about 4 questions then decided I was too stupid to understand the risks, I tried answering them different ways a few different times but still didn't manage to convince the computer I was smart enough. If i'm honest I didn't fully understand the risks, but i'm pretty sure I could only lose whatever money I used to buy the fund so can't see why this is so different to individual shares. Since then oil has gone up, not sure if or how much that specific fund has gone up, I lost interest with all this computer says no rubbish

Albermarle

If i'm honest I didn't fully understand the risks

On the classic list of time honoured investment advice are these wise words

Never invest in anything you do not fully understand ( or at least 90% understand ) 

Which is why as an amateur  investor , I don't  get into this kind of area.

bargainhunter888

Albermarle said:

If i'm honest I didn't fully understand the risks

On the classic list of time honoured investment advice are these wise words

Never invest in anything you do not fully understand ( or at least 90% understand ) 

Which is why as an amateur  investor , I don't  get into this kind of area.

i suppose you have to learn some day?
I have just bought an ETF, i mean i've read a bit on forums, JustETF, HL siite, Monevator, Youtube vids, but i wouldnt say that i fully understand it? in simple terms I know:
If i buy at X today
X goes up 10% tomorrow
I sell X and make 10% profit, less the trading fee
and i know that the value of X depends on various factors, then i'm fine with that.

So with the whole ETC/ETF is where i thought i understand, because most rhe resources i read say they are just traded line shares which is great, but after many reponses on this forum, it's thrown out some risks which ive never heard of, whether it's specially to do with gold or specifically ETFs.
in this pure example, i wanted to buy an ETF when oil was $20 a barrel and now it's $25 a barrel - i would have profited assuming all i needed to do was click the "Deal now" button. but that opportunity has been lost.

Thanks 

ColdIron

I don't know why you are concentrating on sophisticated and niche areas when you are plainly struggling with the basics. Walk before you run would be my advice