Are you interested in investing in gold, but you don’t know where to start? Does the idea of looking for a good dealer, choosing between gold coins, gold bullion or gold jewelry, and then storing your gold intimidate you? If it does, you should consider buying one of the Gold Exchange Traded Funds (ETF).

First, what is an ETF? It’s an investment product that represents a basket of securities or other financial instruments that track a stock index or commodity. As a practical matter, they act somewhat like a mutual fund, but their fees are lower due to a less hands-on approach since they are not actively managed (they simply track something–ETF managers do not choose stocks).

There literally thousands of ETF’s, mostly ones that follow stock indexes like the S&P 500, the Russell 2000, Chinese tech stocks, and other broad or narrow equity indexes. And then there are ETF’s that focus on commodities such as oil or wheat, and for metals, like gold and silver.

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There are at least a couple dozen gold ETF’s (not called Gold ETF funds, but gold exchange traded funds or gold ETFs) that attempt to track the gold price or offer something related to the price of gold. With ETF’s, as with stocks, it’s important to stick with the largest ones that have a high average daily volume of transactions. This is because if the volume is not sufficient to provide instant liquidity, your buy or sell could cause an order imbalance and you won’t get a competitive price.

The best gold ETF, and really the only gold ETF you should consider, is the streetTRACKS Gold Shares ETF (GLD), the largest gold ETF in existence, with a market cap of about $50 billion and an Average Daily Volume in the tens of millions of shares traded.

GLD backs it’s share price with physical gold. As of this writing in September 2010, GLD is holding about 1300 metric tons of gold. The trust holds gold, and as explained in this Yahoo Finance description, “is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.”

The GLD moves in relation to the gold spot price. It’s price is not the same as an ounce of gold, but it moves in the same percentage, up and down. Compare a GLD price chart with a gold price chart and you’ll see that they move identically. As such, it is a perfect proxy for the physical gold ownership.

If the market is open while you are reading this article, you can pick up your phone to your broker, or go to any online stock brokerage such as etrade.com, and in minutes own as much of it as you like. it’s that simple. And you can sell with the same convenience. In addition, if you are bearish on gold, you can short the GLD.

Note that there are gold mutual funds as well, but they are actively managed and invest in gold mining companies, rather than the precious metal itself. While these move with the price of gold, they are actually leveraged to the price of gold, so the move more rapidly. That’s great in a bull market in gold, by not in a bear market.

There are ETF’s for other precious metals as well, should you want to invest in them. For example, if you’d like to invest in silver, there is the iShares Silver Trust ETF (SLV). But that’s the subject for another article.

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