Gold historically has been an important store of value and continues to be a critical investible asset today, just like it was a hundred years ago.
In addition to being a substance of value, gold is often looked upon by investors as a reliable hedge against inflation.
However, holding physical gold in significant quantities can be cumbersome and expensive. That’s why many investors prefer to buy and sell gold in non-physical forms.
You may choose to invest in gold through derivatives, gold funds, gold mining stocks, or gold receipts. Here is a brief description of each option that lets you own gold without physically holding it.
In a digital world it is now much easier and safer to own gold and keep a track of it without having to physically stash it somewhere. Mutual funds, ETFs, derivatives, and gold receipts are all effective strategies gold investors are using worldwide.
If you feel that the economic conditions are uncertain and it is worth diversifying your portfolio, investing in non-physical gold may be the way to go.
To gain investment exposure to gold, derivative markets are usually the most efficient and cost-effective way. They also provide the highest leverage.
However, for an average gold investor, derivatives markets can be complex and rather inaccessible.
Therefore, typical investors acquire gold exposure through gold exchange-traded funds (ETFs), funds which get traded on the stock exchange like any other shares, or gold mutual funds.
One of the most widely held gold ETFs is the SPDR Gold Trust, which operates with an investment goal of having its share price reflect how the gold bullion price is performing.
Sophisticated investors may also consider a leveraged gold ETF such as ProShares Ultra Gold, where the investor gets a two-times long exposure.
Another example of a leveraged gold ETF is Goldcorp, which provides a two-times short exposure.
Gold mining stocks
Unlike gold funds, gold mining companies are not involved in the business of buying or selling gold based on price fluctuations and future demand.
Gold mining stocks are something to consider when the investor is looking to gain an indirect gold exposure by owning shares of gold mining companies. These companies, such as Kinross Gold and Barrick Gold, are in the business of mining and selling gold.
Gold mining companies aim to profit from the difference between their cost of mining gold versus the price at which they can sell it.
In simple terms, if you own the stocks of these mining companies as an individual investor you are getting an exposure to the company’s profit margins, just as you would do by owning stocks of any other company.
You might also consider a gold miner ETFs to get an exposure to gold mining stocks. One of the popular gold mining company ETFs is the Market Vectors Gold Miners.
The gold derivatives market makes use of gold as the base asset. Gold derivatives are contracts which permit delivery of gold at a future date.
As the owner of a forward contract on gold, you will have the right to purchase physical gold at a future date at today’s specified price.
You can trade a forward gold contract over the counter. The buyer and the seller of the contract can customize the terms of contract mutually, such as the date of contract expiration and how much quantity of gold should be delivered at which location.
You may also trade a futures gold contract, which works in a similar way as the forward contract, with a key difference being that futures trading occurs on an exchange and the exchange will pre-set the contract terms. The buyer and seller cannot customize the terms.
It is important to understand that since forward trading takes place over the counter (OTC), it exposes both the buyer and the seller to credit risk, that is, one of the parties might fail to deliver on the terms. This risk doesn’t existent in futures trading on the exchanges.
In many cases, futures or forward contracts might not be held until the date of expiration.
This means there is no physical delivery of gold. Instead, the contract is either sold (closed out) or rolled over to a new contract with a new date of expiration.
It is also possible to gain non-physical gold exposure through call options. Unlike forward or futures contracts that obligate the buyer to own gold at some future date, a call option means the owner gets a right to buy gold but is under no obligation to do so.
Call options are executed only when the gold price is favorable. If not, they are left to expire.
You can think of the call option premium (the price you pay for the option) as a deposit you make for acquiring a right to purchase gold at a future date at a price specified today.
If the gold price exceeds that specified price, you will make a profit as the owner of the call option. On the other hand, if the price does not move above the specified price, you will only lose the premium you paid.
Gold historians believe that gold receipt system was one of the earliest forms of banking, where goldsmiths would issue receipts to members who would store their physical gold with them. Members could redeem their receipts for gold at a future date.
You can invest in gold receipts even today and redeem them for physical gold at a future date. Some private mints offer this opportunity to gold investors.
For instance, you can invest in exchange-traded receipts (ETRs) issued by the Royal Canadian Mint (a private company). ETRs are backed by the company’s vaulted physical gold. ETRs can be traded on an exchange or can be bought and sold privately.