Gold has remained valuable today with many investors seeking gold exposure, as the precious metal serves as a store of value as well as a hedge against inflation.
However, it can be difficult and cumbersome to hold large quantities of physical gold. Here are some of the best ways you can invest in and gain exposure to gold without actually owning them physically.
According to some theories, the earliest form of banking happened through goldsmiths who would keep the gold of members of the community.
As a return, those who deposited gold would receive a paper receipt that could be redeemed for their gold at some time in the future.
And because they know that at any given moment only a small fraction of those receipts would be redeemed, they could give receipts for a bigger amount of bullion than they actually kept in their storages. And that’s how a fractional reserve credit system was made.
In modern times, you can still invest in gold receipts that can be redeemed to get some physical gold. Even though most government mints don’t deal in private with gold anymore, some enterprising private mints do.
While receipts are assets backed by gold and can be redeemed on demand, the derivatives market use gold as an underlying asset.
Derivatives are contracts for the delivery of gold at some point in the future. A forward contract on gold brings the contract owner the right to buy physical gold at some point in the future, with a specific price specified on the day the contract was agreed upon.
Traders trade forward contracts over the counter (OTC) and the buyer and the seller can customize to arrange the terms like contract expiration and the nature of the asset.
Meanwhile, futures contracts run in largely the same way as forwards. Their difference is that futures are traded on exchanges.
The terms of the contracts are specified by the exchange and these terms are cannot be customized by either the buyer or the seller.
Meanwhile, call options can also be used to invest in gold. Not quite like futures or forward contracts, call options provide the owner the right but not the obligation to purchase gold.
Using this way, the call option contract can only be exercised when the price of gold is favorable. If the price is not good, the contract can be left to expire, at which point it will become worthless.
If the actual price of gold soars above the specified price, the owner of the call option will make a profit. If not, the option buyer will lose the premium he paid for the contract.
Even though the derivatives market appears to be the best candidate to gain exposure to gold, it is not very suitable for starters.
A newbie investor can gain exposure to gold through the use of mutual funds to buy gold. The trader may also use exchange-traded funds, which are traded in a similar manner to shares.