The Simplest Way to Profit From Gold And Silver Right Now

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TheFederal Reserve Bank has been pulling out all the stops to help the U.S.economy gain strength, but many fear the Bank's aggressive moves eventually could lead to a serious backlash.

We spelled out those concerns in this article, and thoughthe Fed 's bold $1 trillion move hasn't led to ruinousinflation just yet, many inflation hawks have been loading up on gold and silver -- just in case.

Of course, buying and storing gold and silver bullion is no simple task. That's why many investors prefer to own these two commodities through exchange-tradedfunds ( ETFs ).

There are a wide range of options, and here's a quick primer on the topic.

The metal or the miners?
ETFs focus on gold and silver miningstocks , as well as the commodities themselves. If you want to own the mining companies, then you need to differentiate between two camps: Industryinsiders call them "senior miners" and "junior miners." The senior miners already own many productive mines, and sell tons of gold and silver every year. They are fairly mature and already generate prodigious streams ofcash flow , so investors are able to analyze these stocks in a more traditional way, using measures such asprice-to-earnings ratio (P/E ) andprice-to-book ratio (P/B) .

The junior miners are smaller, development-stage companies and own mines that have yet to be developed. These companies typically have little or no sales yet, so investors are left to assess thereal estate value of those mines and try to anticipate what future cash flows might look like.

Why take a chance on junior gold miners if they are absorbing ongoing losses? Because investors tend to discount their value while mine development gets under way -- and if the mines turn out to have a mother lode of gold, the company'sstock can soar far higher.

There are a wide number of options forETF investors looking at this sector. Theinvestment management firm Van Eck, for example, offers theMarket Vectors Gold Miners ETF ( GDX ) and the Market Vectors Junior Gold Miners ETF ( GDXJ ) . The firstfund focuses on big miners such as Barrick Gold ( ABX ) and Goldcorp ( GG ) , while the latter focuses on development-stage mining companies.

In a similar vein, the Global X Silver Miners ETF ( SIL ) ownsshares of many of the leading silver mining companies in Canada, the United States, Mexico and South America.

Skip the miners?
Mining companies don't always rise or fall in value in tandem with gold and silver prices. These firms incur hefty expenses to complete their mining efforts, and their profits are therefore not directly correlated with the underlyingcommodity prices.

That's why some investors prefer to own the precious metals themselves, which you can also do through ETFs. For example, the iShares Gold Trust (IAU) , carries a very reasonable 0.25%expense ratio and moves in lockstep with gold prices.

Perhaps the most populargold ETF is the SPDR Gold Shares (GLD) , which trades a hefty 9.6 million shares a day. Each share represents roughly one-tenth of an ounce of gold. However, the slightly higher 0.40% expense ratio for the SPDR Gold Shares may make the iShares Gold Trust the wiser choice if you plan to trade in and out of these funds.

If you're reallybullish on gold, check out the PowerShares DB Gold Double Long ETN (DGP) . It is a leveraged 2X fund (it's called 2X because it moves up and down double the rate of the price of gold) based on the price of gold, helping it to post stellar gains as gold has rallied in recent years. Yet you should be looking at this fund only if you are anticipating a solid upward move in gold, as the fairly high 0.75% expense ratiowill eat into returns.

Think gold is due for a pullback after multiyear gains? Check out the PowerShares DB Gold Double Short ETN (DZZ) , which moves in the opposite direction of gold prices.

Several silver-focused ETFs also are tied to the commodity price, and not theprofit results of silver mining firms. The iShares Silver Trust ETF (SLV) is the most popular, trading more than 10 million shares per day and with nearly $10 billion in assets under management.

Yet if you're especially bullish on silver prices, check out the ProShares Ultra Silver ETF (AGQ) . This fund trades more than 1 million shares daily and moves at twice the rate of the underlyingspot price of silver. A quick glimpse of the price chart for this ETF shows a steady decline ever since silver prices peaked in early 2011.

The current price, near multiyear lows, might prove to be a great entry point for far-sighted investors who think silver prices will trend higher again in comingquarters .

Action to Take --> These ETFs provide exposure to the metals and the miners and typically carry expense loads that are far lower thanmutual funds focused on thisasset class . If you think the Federal Reserve's aggressive actions are generating too much risk for the U.S. economy, then these ETFs should provide a solidhedge .

This article originally appeared on InvestingAnswers.com:
The Simplest Way To Profit From Gold And Silver Right Now




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Commodities

Referenced Stocks: ABX , GDX , GDXJ , GG , SIL

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