2. ETFs

Gold exchange-traded funds are a popular way to have gold exposure in your portfolio without the hassle of storing the physical metal. First, you can invest in one of three physically backed ETFs, which track gold's spot price.

The most heavily traded ETF is SPDR Gold Shares ( GLD), which has $50 billion in net assets. The gold ETF has 1,286 tons of gold and saw record inflows as fears ballooned over Europe sovereign debt fears and a weak U.S. economy. The stock is up 8.06% year to date. Paulson & Co., run by legendary investor John Paulson, is the largest holder of GLD with more than 30 million shares.

iShares Comex Gold Trust ( IAU) recently lowered its fee to 0.25% making it the cheapest gold ETF.

The newest gold ETF is ETFS Gold Trust ( SGOL), which launched in September 2009. This gold ETF actually stores its gold bullion in Switzerland, which gives investors access to different types of gold.

For each share of these ETFs you buy, you generally own the equivalent 1/10 an ounce of gold. If investor demand outpaces available shares then the issuer must buy more physical gold to convert it into stock. Conversely, when investors sell, if there are no buyers, then gold is redeemed and the company must then sell the gold equivalent.

Gold ETFs are not owned for leverage, but simply as a vehicle to own gold. There is the possibility of redeeming shares for physical gold, but that arrangement is conducted with brokers and is typically more difficult.

If you want the opportunity of redeeming your shares for gold, another option is Sprott Physical Gold Trust ETV ( PHYS), which launched in February. This closed-end mutual fund gives investors the option of trading in their shares for 400-ounce gold bars.

The fund can trade at a huge premium or discount to its net asset value at any time and has higher fees, making it more expensive to invest in. An investor can obtain physical gold on the 15th of every month, although the holder has to make transportation and storage arrangements.

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