How is gold traded? The financial markets offer investors a platform to trade using several financial products.
Gold is a fast market commodity owing to its price volatility; usually experienced after a period of relative consolidation and price stability and securities markets reaction to the performance of the US Dollar.
Here are 5 ways to trade gold for investors.
Exchange-traded funds (ETF’s) for gold allow investors to trade gold without physically handling the bullion. Gold EFT’s track the performance of gold spot prices against the various market indexes and hence provide investors with the opportunity to own gold without using it as leverage. The passive management approach of EFT’s ensures that investors’ gold shares are always valued at the optimum market level in tandem with the various market indexes. The virtual gold traded in EFTs is however backed by physical gold assets that are shared among the investors.
- Miner single stocks
Investors can buy stock in the gold mining companies in speculation of a dividend due to profits from increased gold prices, or short-term trading opportunities. However, gold miner stocks, including junior gold stocks, are risky because their performance is leveraged against both the domestic market and by the gold spot prices. This gives the investment a 3-to-1 leverage on either side of investing. Traders can be spooked by either the gold spot price or by the domestic factors, making the investment volatile and hence suitable for investors with a large risk-tolerance.
- Physical gold bullion
Unlike the EFT’s, traditional gold trading entails purchasing and selling gold coins, bars and jewelry and storing them in a safe at home or in a deposit box at the bank. The physical gold inventory acts as a currency hedge or an alternative source of cash that offers high liquidity. An investor may alternatively purchase physical gold from the markets and resell in retail shops as bars, coins or accessories after value addition. The trader places a markup on the products based on the costs and sentimental value put on the gold products.
Gold exchange-traded notes (ETN’s) are debt facilities an investor extends to a bank, tracked against specified indexes. Upon maturity, the investor gets the equivalent of the index performance in the form of gold. This approach does not guarantee an investor of positive returns and hence it is risky as it lacks a principle guarantee. However, the flexibility of ETN’s allows an investor to strategize gold trading as either long-term, short-term or pursue a mixed strategy.
- Closed-end funds
These funds provide investors with a less risky opportunity to invest and trade in gold. The closed-end funds that specialize in gold trading have a portfolio of gold assists where traders chose to trade at a premium or at a discount. The closed-end funds select companies that are conservative, efficient and reliable hence provide a less risky opportunity for investments.