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Materials ETFs Cash In on Gold's Appeal

Materials ETFs are likely to reap the benefits of positive price support in gold.

Because of waning confidence in global growth and currency instability, investors continue to seek gold as a safe haven, pushing the shiny metal to record levels.

On Friday, gold soared passed the mark of $1,260 an ounce, pushing gold futures up nearly 15% year to date and there is positive support indicating that the metal will go higher.

From a demand perspective, not only are risk-averse investors turning to gold, but central banks are as well. According to data released by the World Gold Council, nations around the world are gobbling up gold in an attempt to decrease risk and mitigate the effects of a country's economic policies.

Russia appears to be the largest buyer of gold among all central banks, purchasing nearly 26.6 metric tons of the metal in the first quarter of 2010. After Russia, the Philippines reportedly purchased 9.6 tons earlier this year in an attempt to support its local industry and hedge against inflationary pressures.

The third major buyer of the precious metal is Kazakhstan, which reportedly has purchased 3.1 metric tonss in the first quarter of the year. Not only does gold enable these nations to diversify their wealth by spreading risk, but it also bolsters their global creditworthiness.

Although India and China have not made any significant gold purchases in 2010, they are still considered major buyers of gold. In November 2009, India increased its gold reserves by 55% through the purchase of 200 metric tons of the metal from the International Monetary Fund.

As for China, it is the world's largest producer of gold and often buys from its own mines, not publicly reporting the purchases. With this in mind, the nation could potentially be the world's largest buyer of gold. One thing is for sure -- China is a major buyer and holder of gold and has admitted to significantly increasing its gold holdings over the last seven years.

The appeal of gold, both from an investor's perspective and from a central bank's, will likely remain prevalent as fear continues to loom over the overall strength of the global markets and safe-haven assets are sought after.

Video: How to Buy $1,260 Gold >>

In addition to traditional ways of playing gold, these exchange-traded funds are likely to reap the benefits of positive price support in the metal:

  • The iShares S&P Global Materials (MXI) - Get Report, which allocates nearly 10.1% of its asset base to companies involved in mining, exploration and production of gold. Some of its top holdings include Barrick Gold (ABX) , Goldcorp (GG) and Newmont Mining (NEM) - Get Report. MXI closed at $57.47 on Friday.
  • The Materials Select Sector SPDR (XLB) - Get Report, which allocates 5.37% of its assets to Newmont Mining and 9.76% of its assets to Freeport McMoRan (FCX) - Get Report, which is a major player in the mining and production of gold. XLB closed at $30.95 on Friday.
  • The Vanguard Materials ETF (VAW) - Get Report, which allocates 7.16% of its assets to Freeport McMoRan and 4.88% to Newmont Mining. VAW closed at $65.85 on Friday.

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When investing in these ETFs, it is equally important to keep in mind the inherent risks involved. To help protect against these risks the use of an exit strategy which identifies specific price points at which an upward trend could come to an end is of importance.

According to the latest data at

, the price points are as follows: MXI at $54.89, XLB at $29.57 and VAW at $62.76.

Written by Kevin Grewal in Houston


At the time of publication, Grewal had no positions in the securities mentioned


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Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.