GOLD: USD/oz1,216.50 | EUR/gr36.43SILVER: USD/oz17.22 | EUR/gr0.5175

physical and financial gold

Methods for investing in gold can be divided into physical and paper methods.

The traditional physical forms of holding gold : these are represented by bullion, small bars, plaques, gold coins and medals, goldsmithery items. Private investors can deal in gold through metal accounts, which have a similar function to bank accounts and are divided into allocated metal accounts (bullion can be identified by their number) and unallocated accounts (the investor has the right to a quantity of unspecified gold). In both cases the investor can buy and sell the metal without coming into direct contact with it, even if he can withdraw it at any time. For the investor it is possible, after purchasing gold, to deposit it with the seller himself, receiving a deposit certificate which can be transferred by endorsement which allows change of ownership without the physical delivery of the metal. We should remember the following financial instruments: Options Futures Gold Warrants Gold Swaps Gold Investment Funds, Forward transactions, Gold Shares Gold loans

Options

An option is a derivative contract which grants one of the parties (following payment of a sum of money, called a premium), the right to exercise the purchase or sale of the metal at a defined price within a certain due date. The buyer therefore of an option has the right but not the obligation to buy or sell a set quantity of gold at a price that is fixed in advance and at a prefixed expiry date. For this right to choose, the investor has a cost which is the premium. 

 

CALL OPTION

PUT OPTION

 

Buyer
(holder)

Has the option to purchase at a defined price

Has the option to sell at a defined price

Pays the premium

Seller

(Writer)

Is obliged to satisfy the request of the Holder selling the good

Is obliged to satisfy the request of the Holder buying the good

Collects the premium

The options are American ones when they can be exercised before the expiry date and European when they can be exercised only at the expiry date. The price of the premium is influenced by supply and demand, interest rates, the expiry date, and the expected volatility of the price of gold. The base options are “Call” and “Put”. From these base options various combinations can be created which exist when options bought and sold with different characteristics are put together; some of these are the butterfly, the straddle, the strangle, the condor, the call ratio backspread. The most important market is Comex.

Forward transactions   
With forward transactions the operator commits irrevocably to buying or selling a certain amount of gold at a due date and at a price set when the transaction is concluded. In this case the commitment and fulfillment, or rather delivery and payment take place on different dates. It cannot be cancelled, but can be liquidated at any time before the due date, by carrying out the opposite contract at the same due date. This transaction is advantageous for investors and operators that do not need to have the monetary counter value immediately and for metal producers that sell future extractions.

FORWARD TRANSACTIONS

OPTIONS

Obligation to receive the gold at the expiry date paying in cash.

Right and no obligation to receive gold at the expiry date.

Protection from risk of exchange rate.

Protection from risk of exchange rate.

Does not allow a favourable movement of the gold market and/or of the payment currency to be taken advantage of.

The buyer may take advantage of a favourable movement of the gold market and/or of the payment currency as he can always choose between strike price and actual price.

Any lack of gain can only be determined when the contract expires.

The cost of the option can be determined immediately by the premium to be paid.

Only a forward price is available (spot value + premium given by AU/USD rate differential) which may not satisfy the client.

The buyer can ask for the exchange rate or the strike price taking on higher or lower costs.

Futures

Gold futures is a contract in which the parties commit to delivering and receiving a quantity of gold, at an predefined expiry date and price. For all futures transactions a marginal initial deposit is requested, to be adapted to any price oscillation. The premium of the futures price compared to the spot price, called the contango, is influenced by the interest and by the cost of storage and insurance. The characteristics therefore of the futures contract are: standardized quantity and expiry date, deals on regulated markets, clearing house as the counterpart, and guarantee margin and daily valorization of the contract. A futures contract rarely remains open until it expires, often positions are closed early, by taking on the opposite position to the starting one. Those who are interested in futures are speculators, hedgers (especially mining companies), anyone who hedges against the price risk.

Gold Warrants  

Gold warrants are essentially gold purchasing options, at a defined price that can be linked to shares and bonds. Usually they are put warrants and give the possibility to receive the difference between the gold market price and the warrant exercise price at any time in the given period. The holder of a paid warrant has the right, at a defined date and after payment of an amount, to the delivery of a certain amount of gold. Furthermore security that can be converted into gold offer an interest rate and can be converted into gold before or after the expiry of the security itself; therefore the investor owns an option on the price of gold which also pays interest.

Gold Swaps        

With gold swaps the bullion are transferred to a seller in return for cash, with a determined forward price at which the gold will be returned. Although it is comparable to a spot sale with forward repurchase, the difference is that the counterparts are the same, thereby avoiding transactions on the market and therefore with no effect on prices.

Investment funds           

Gold investment funds are specialized in gold investments worldwide. People use funds (located mainly in Great Britain, Switzerland and U.S.A.) to reduce the risk, rather than investing in one stock.

Gold loans          

In the last ten years we have witnessed a large growth in the gold loan market thanks also to banks that have begun to loan gold to miners. In this way mining companies sell the gold obtained on loan to obtain liquidity to finance their company and at the expiry date the mining company returns the loan using extracted gold. The Central Banks account for ¾ of the supply of loans.

Gold shares       

A form of investment in gold is represented by the purchase of gold shares. In this type of investment it is necessary to assess the shareholders’ equity, the financial and technical characteristics, foreseen growth of the mining company, oscillations of foreign currency and even possible changes in the tax regime of the country. Compared to the direct purchase of gold, in this case the investor can take advantage both of the performance of gold as well as the Stock Exchange. The most important markets are those in South Africa, Canada, Australia and the United States.     

ETF

ETF are collective investment saving instruments on regulated markets that aim to replicate, with a tight margin gap, known financial indexes and that are representative of particular equity or bond markets. In the case of gold, the financial instrument replicates exactly the performance of the underlying metal, whose nominal value is expressed in a fraction of an ounce (generally 1/10). In short, we can say that ETF is a type of gold shares as the paper is in any case covered by physical gold. The body that issues the ETF in fact has to deposit the counter value in physical gold for the stock subscribed. The first ETF on gold, sponsored by the World Gold Council made its debut on the NYSE in November 2004 with the name of Streettracks Gold ETF, renamed SPDR Gold Trust, meeting immediately with excellent success among investors. Subsequently products listed on the main world stock exchanges and the principal gold exchanges such as London, Dubai, Shanghai, etc were launched.

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