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A Guide to Precious Metals ETFs

It's important to understand your personal perferences and market outlook before investing in a precious metal ETF.
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NEW YORK (TheStreet) -- Thanks to the introduction of precious metal ETFs, investors have easy access to this long-standing asset class. Those looking to add a little shimmer to their portfolio can easily do so using any one of the physically backed ETFs currently available.

Choosing between gold, silver, platinum and palladium, however, can provide challenging. In order to determine which makes the best investment, it is important to understand your own personal preferences and market outlook.

Which Precious Metal ETF Is Right For You?

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Are you worried about the future?

In 2008, gold finished the year with a slight gain, while most other commodities suffered huge losses. Since the metal does not have a large amount of industrial demand, investor demand was sufficient to offset a decline in jewelry demand.

With BP still tripping over its own feet in its efforts to stem the flow of oil pouring into the Gulf of Mexico, Europe still embattled in their debt issues, China taking aggressive steps to cool their overheating housing market and South Korea at odds with North Korea, it is easy to find reasons to be concerned about the future of the global markets.

Investors looking for a strong way to plan for the worst should look to gold with ETFs such as

SPDR Gold Shares

(GLD) - Get Report

,

iShares COMEX Gold Trust

(IAU) - Get Report

or

ETFS Gold

(SGOL) - Get Report

.

These three are physically-backed gold ETFs. The major difference between the funds is where they store the metal. SGOL offers investors gold held in Switzerland, IAU in New York, and GLD in London, New York and Toronto.

Gold is the best bet for situations that will damage economic growth, either extreme deflation or inflation. We've already seen gold perform well during the 2008 deflation. If inflation gets too high, however, gold is also likely to outperform if the economy tips into stagflation since industrial demand will be waning.

Are you interested in joining the green movement?

Platinum and palladium are two metals used extensively by the automobile industry in the production of catalytic converters. These devices are used to reduce the toxicity of an automobile's emissions.

Investors looking for exposure to these two metals should be sure to check out

ETFS Physical Platinum Shares

(PPLT) - Get Report

and

ETFS Physical Palladium Shares

(PALL) - Get Report

. Launched during the opening weeks of 2010, these two funds have since grown to become wildly popular products for precious metals ETF investors.

Playing these white metals has not always been easy. Prior to the launch of PALL, investors looking for ETFs or ETNs aimed at playing palladium were out of luck. The platinum market, on the other hand, was represented by a small collection of products which used derivatives and failed to attract sufficient assets, making them too dangerous for any long-term investor.

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PALL and PPLT should continue to do well as auto manufacturers continue to take steps to cut back emissions to please the increasing social consciousness of the everyday consumer and emerging markets begin to pass tougher emissions standards.

These metals are the best choice for investors who expect economic growth, and they should perform especially well if there's economic growth and inflation. Given the very volatile nature of palladium, it's the best choice for aggressive investors.

Are you looking for a good deal?

Silver offers a relative bargain for investors, and that makes

iShares Silver Trust

(SLV) - Get Report

and

ETFS Physical Silver Shares

(SIVR) - Get Report

the value investor's precious metal ETF. In addition to silver trading at the low end of the silver/gold ratio, these ETFs are easier on the pocketbook, charging only 0.39% and 0.30% respectively.

Silver has potential because, while gold has regained some of its monetary status, silver trended with the industrial metals in 2008. Some silver bugs expect silver to experience a breakout, however, and for the ratio to climb all the way back to levels unseen since the late 1970s, when the Hunt brothers were buying up the metal. More conservatively, for the ratio to just return to where it was in 2008, silver would have to outperform gold by about 25%.

Are you optimistic about the future?

Looking forward to the next six to 12 months, I am optimistic about the global economy. Although issues in Europe, Asia and the U.S. will continue to pose challenges in the near term, I am still confident that we are well on the road to recovery.

Still, despite my bullishness, I maintain exposure to defensive precious metal plays like IAU in order to hedge against market turmoil.

When developing a long term portfolio, constructing a strong base is essential. Core holdings should not only provide ample upside, but also adequate defense against market challenges. The best way to achieve this is through diversification. Physically backed precious metal ETFs provide a great way to add exposure to an additional asset class.

Investors interested in learning more about the various precious metal exchange-traded products and mutual funds available should make sure they check out my Guide to Precious Metals series. Be sure to click the following links to check out parts

one

,

two

, and

three

.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management was long iShares COMEX Gold Trust.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.