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There are many different methods to invest in gold, or at least where the Gold price affects the investment. This can range from physical Buy gold or investing in mining to investing in complex financial products. The most suitable investment for an investor will depend on their specific requirements and capabilities.
We distinguish the following investments:
1. Physical Coins and Bars
2. Exchange Traded Funds (ETFs)
3. Futures and options
4. Warrants
5. Gold Accounts
6. Gold Accumulatation Plans (GAP)
7. Gold Mining stocks
8. Gold Certificates
9. Gold-Oriented Funds
10. Structured products
The relationship with the price of gold can vary greatly from one investment to another.
According to the historical writings, the first physical gold coin was minted between 560 and 546 BC. Throughout history, the gold coin has been widely used as legal tender. In today's day and age, gold is used more as an investment and less as a payment currency. Gold purchased for investment purposes is exempt from VAT in many countries, including the entire European Union. In doing so, there is a wide range of gold coins and bars for investors to choose from. Many mint issued by public authorities and the Gold bars by certified smelters.
The gold coins often have a face value in their country of issue, which makes them legal tender. The investment coins range from 1/20 ounce to 1 kg, with the troy ounce coins being the most common weights. Investing in physical gold meets the need for people who want an alternative to our financial system.
The gold-backed Exchange Traded Funds (ETFs), also known as index funds, and Exchange Traded Commodities (ETCs) are traded on various exchanges around the world. These financial products are designed to offer investors the ability to link the results to the price of gold. The investment goal of this ETF is to track the underlying stock market index, gold in this case.
Many of these products are backed by gold stored in protected vaults. In 2004, the first ETFs were launched in the United States.
The ETFs offer investors the opportunity to participate in the gold market in a relatively safe way without the investor being supplied with physical gold. At the same time, this is also the reason why several investors do not opt for this option.
3.1 Gold Futures:
Gold futures contracts are binding agreements for the receipt of a certain amount and purity of gold. This on a predetermined date at the agreed price. Due to the leverage effect of the futures, both the profits and losses can be large. This leverage effect is caused by the fact that the amount that is ultimately traded is a multiplication of the deposit.
The largest exchange where futures contracts are traded is the CME Globex (merger of New York Mercantile Exchange and NYMEX).
3.2 Gold Options:
Gold options give the holder a right, but not an obligation, to buy (call option) or sell (put option) a certain amount and grade of gold at a predetermined price on an agreed date. The price of such an option depends on, among other things, the current gold price, the time when it expires and, above all, the predetermined price (strike price).
A high gold price makes for an expensive call option and a low price for a put option. Just like the futures, the gold options can create a leverage effect. The favorable thing about the gold options is that if the strike price is not reached, there is no obligation to exercise the option. As a result, the loss of the holder of the option is limited to the premium paid for the option.
Large investment banks often use 'gold warrants'. These are financial instruments that give the buyer the right to buy gold at a set price on a particular day in the future. The buyer pays a premium for this right. This links these warrants to the gold price. In the past, such warrants were used for shares of gold mining companies.
Investment organizations that offer the possibility for 'gold accounts' (gold accounts) opt for 2 types of gold accounts:
1. Allocated account
2. Unallocated account
5.1 Allocated account:
This is similar to keeping gold in a vault. The gold is physically stored in a vault and is managed by a designated company.
The gold bars and coins are numbered and identified by a hallmark, weight and fineness. These are then assigned to each specific investor. A fee is charged for this storage and insurance for this storage. The holder of the gold has full ownership of the gold and the holder of the gold account is not allowed to trade or lease this gold.
5.2 Unallocated account:
With an unallocated gold account, there is no physical gold specifically allocated to the customer. As a result, no storage and insurance costs are charged. The danger of this is that the investor is exposed to the creditworthiness of the party offering this service. This option is often used for larger quantities for institutional investors, central banks or precious metals parties, such as smelters.
Below are the possibilities for smaller investors.
5.3 Gold pool account:
In this case, the participant receives a share in the gold account. There is a share in the 'pool' that owns an amount of gold. This is a form of unallocated account. Usually, such a share in physical gold can be delivered within a few days.
5.4 Electronic currencies:
There are several electronic currencies that are pegged to gold in allocated storage. This allows gold to be used to make payments. These offer a simple and cost-efficient way of buying and selling gold.
A Gold Accumulation Plan (GAP) is similar to a conventional savings plan, as it sets aside a fixed amount per month. Gold is then bought from this fixed amount on each trading day. The fixed monthly amounts can be small and no premium has to be paid for the purchases. Because small amounts of gold are bought over a longer period of time, such an investment is less dependent on short-term price differences. At any time during the contract period (usually with a minimum of one year), investors can convert their gold into physical gold.
A popular form of relating the investment to the gold price is shares in gold mines. The gold mining sector is large. More than 300 gold mining companies are listed on the U.S. stock exchanges. The value of these shares is driven by the price of gold, as the value of the mined gold also represents more value.
By means of gold certificates, investors can invest in gold without a physical delivery of it. Private banks, mainly in Germany and Switzerland, issue these certificates. The certificate confirms a property on gold with the bank. As a result, the customer has no storage or insurance costs. The customer can easily sell a certificate over the phone.
There are several funds that make specific investments, so that the fund is linked to the gold. The funds vary in structure. Some funds focus on shares of gold miners and others focus on the investments in the underlying precious metal. Many funds opt for a varied approach.
'Structured products' normally have a high minimum investment. As a result, this market is dominated by institutional investors. Two variations are described below.
10.1 Forwards:
Forward contracts are similar to futures. They are agreements to exchange an underlying asset at an agreed price on a specific date in the future. These forwards can be used for risk management or speculative purposes.
The important difference with futures is that forwards are tailor-made as opposed to standardized futures. In the case of forwards, the forward contract is negotiated. The difference here is that futures can be sold freely during trading days and forwards have to be negotiated.
10.2 Gold-related bonds:
Gold-related bonds are possible by buying bonds from the larger bullion traders and investment banks. These products offer a combination of:
- link to gold price fluctuations;
- yield;
- Principal Amount Guarantee.
