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Whether you're a confirmed gold bug or simply interested in diversifying into metals, gold's luster is attracting many investors during these uncertain economic times. Investing in gold takes many forms, from buying the metal outright (in a form known as "bullion") to gold-based futures and gold-specific Exchange Traded Funds, or ETFs.

However, in this case the old saying is true: all that glitters is truly not gold. Many would-be gold investors may not realize that trading gold-specific ETFs, although convenient, have real drawbacks when compared to trading gold futures. A closer look at these differences can be helpful in trading your gold sentiment effectively.

The SPDR Gold Trust

Most traders with limited capital begin by dabbling in the SPDR Gold Trust, the most liquid ETF tied to the gold markets. In August 2008 the trust's accumulated gold reserves held at 659 tons, a mere 0.5% to 1% of the total global gold market -- yet for traders focusing only on gold-based ETFs, this trust is the most liquid bet available.

The draw of this SPDR for many investors is the affordable price. Since each share of the SPDR represents only 1/10 of an ounce of gold, traders need only a small chunk of capital for entry compared to buying gold itself by the full ounce at its spot price.

But affordability is perhaps the only advantage the SPDR Gold Trust offers in comparison to gold futures for the trader looking to speculate with this metal. Traders with more than a few hundred dollars in capital to invest should consider gold-based futures for three reasons: tax implications, non-gold-related market risk, and extra fees.

High Collectible Taxes

Traders of a gold-specific ETF have no claim on actual gold ownership and, as of 2008, were taxed on their ETF ownership as a "collectible". Like coin- or antique-collecting as an investment, gold-specific ETF owners are subject to a large capital gains tax on long-term investments -- maximum rate of 28% versus 15% on other long-term capital gains.

This comes as an ugly surprise to many ETF investors. Of course, exiting before a year is up results in two other negatives: higher short-term capital gains taxes and less ease in participating in gold's longer-term trends.

Outside Market Risk

ETFs that trade gold are subject to company risks, just like any ETF; these risks have nothing to do with the larger gold market. For example, the SPDR Gold Trust can be liquidated if the trust drops below $350 million, if the net asset value (NAV) dips below $50 million, or simply by agreement of 66.7% or more of the shareholders in the trust.

Additional fees

Gold is an inherently diminishing investment. It does not produce income of its own; it's simply a trusted store of value. To cover their ongoing expenses, however, ETF managers sell gold, creating a taxable event with each sale. They also collect typically 0.4% in management fees, as well as any sponsorship or marketing fees. All these "dings" can make a real dent in the value of your investment over time.

Gold Futures: Simple and easier to leverage

Compared to these drawbacks, gold-based futures offer a fairly straightforward picture. The tax implications of gold futures for the investor are the same as any other futures contract with no time-based penalty. There are no management, sponsorship or marketing fees.
Because of margin, investors in gold-based futures can control up to $20 of gold for every $1 invested. Leverage should be used carefully, as it magnifies both gains and losses - but for many investors it can be a useful tool.

Finally, as with any trading vehicle, you need to know whether the market's liquidity will have a negative impact on your ability to get the entry and exit price points you seek. And given today's market conditions, it's especially important that you be able to establish long and short positions with equal ease: another strength of the futures market.

Ask your futures trading consultant for additional information about gold-based futures and help in determining if this investment is right for you.

Vincent Hayes is currently the Director of Sales for RJO Futures. His previous experiences include working as a Commodities Broker for ZAP Futures and a Foreign Exchange Broker for Global Forex Trading. He trained with Larry Pesavento and Mark Douglas on Fibonacci Ratios, Pattern Recognition and Trading Psychology. Vincent has a degree in Finance from Western Michigan University. Additionally, Vincent has appeared on Bloomberg Radio and CNBC.

Vincent Hayes can be reached at (312) 373-5303 or via email at vhayes@rjofutures.com

Ready to Learn About Options Strategies?

Introduction to Options Trading Strategies, a new COMPLIMENTARY guide from RJO Futures, can help you get started. Featuring easy-to-understand explanations, concise examples and sample charts for basic options strategies, it's a must have tool for any level of trader.

Sign Up for Yours Today!