We’ve long been cynical of the investment case for precious metals, yet many a skittish investor favours gold in uncertain times. While gold coins offer a psychological sense of security, commodity ETFs are a more liquid (and sensible) alternative.
Investment in commodity ETFs isn’t allowed within the tax-free space. Equity ETFs are invested in a number of different companies that meet certain criteria. Diversification is built in, reducing the risk to the investor. Commodity ETFs, on the other hand, buy and hold the physical asset. Any growth within the ETF is the result of commodity price movements. Investors run a greater risk of losses should they cash in a portfolio when the price of the commodity is under pressure.
By the same token, however, commodity prices are largely unrelated to local market movements. The prices of gold, platinum and palladium are determined by global supply and demand. That these ETFs are unrelated to the South African economy and market movements could make them an attractive hedge in troubled times.
Hint: We provide a list of commodity ETFs in this post.
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