INVEST IN GOLD WITHOUT OWNING IT
Apparently, a trader can invest in gold without possessing it. Here’s how.
Derivatives. The derivatives markets use gold as the underlying asset. Its contracts allow for delivering gold in the future. With forward contract, which is traded over the country, the owner has the right to purchase physical gold in the future at a predetermined price. The terms, including its maturity and the nature of the underlying, can also be modified depending on the preference of the buyer and the seller.
Futures contracts work like forwards, except futures are traded on an exchange, which sets the terms. Since forwards trade over the counter, involved parties may experience credit risk where the counterparty may fail to deliver it. However, exchange traded futures eliminate such risk. Physical gold is not given unless forward or futures contracts are not owned until expiration. The contracts are either sold or rolled over to another contract with a later maturity.
Take advantage of the call options to gain exposure in gold. A call option gives the owner the right, not the obligation, to purchase gold. It is only exercised when the gold’s price is favorable; otherwise, it becomes worthless. Therefore, the price paid for the option can be considered a deposit for the right to buy the gold in the future at its current rate. The owner will gain a profit or lose the premium.
Gold funds. Go to derivatives markets to gain exposure to gold. It also provide the highest extent of leverage. But an average investor cannot access these markets. Fortunately, he can gain exposure to gold through mutual funds which purchase gold or gold ETFs. Some examples include SPDR Gold Trust ETF and Goldcorp.
Gold mining stocks. While it gives an indirect way of obtaining exposure to gold, most gold companies generate profit according to the cost to mine for gold against what they can sell it for. They do not cash in on price speculations. In other words, majority of gold firms hedge their exposures to gold price risk in derivatives markets. Owning shares of these companies may give you exposure to the company’s operating profit margins. If you still opt to venture in gold stocks, you may want to consider Market Vectors Gold Miners.
Gold receipts. Some believe the oldest form of credit banking occurred via goldsmiths, in which they would keep the gold of the community members. Those who deposit gold would receive a paper receipt, which is redeemable in the future. At that time, only a small portion of those receipts would be redeemed. So goldsmiths issue receipts for a bigger amount of bullion than they actually store in their reservoir. Hence, the inception of a fractional reserve credit system.
It remains possible to venture in gold receipts that can be claimed for physical gold. Most government mints no longer deal privately with gold, certain private mints still do, including Royal Canadian Mint. The entity offers electronic tradable receipts, which can trade on an exchange or be dealt privately, as well as collectible coins minted from precious metals.
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