Investments in Gold – Chapter 10: Paper Gold Investments

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Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 10 out of 15. Read the rest: Read Investments in Gold – Chapter 1: Introduction Read Investments in Gold – Chapter 2: Advantages of

Investments in Gold – Chapter 10: Paper Gold Investments

This is chapter number 10 out of 15. Read the rest:

The processes of prospecting, mining and refining metals are extremely technical in nature. Those who wish to invest in gold exploration and production companies stocks should educate themselves with some basic knowledge about this industry. This is so that you can identify any likely snags or evaluate the risk reward relationships in these investment sectors. You are also advised not just to purchase one or two stocks in individual companies but rather a mutual fund or a basket of unhedged stocks.

Derivatives like Exchange Traded Funds, gold forwards, futures, options as well as spread betting are usually used for speculations on the future prices of gold and other commodities markets like equities, bonds, exchange rates, index of a stock market or even weather condition index. These are financial instruments whose values are derived from the above mentioned commodities, rates or indices. Any investment in this class of financial instruments does not allow an investor to direct ownership nor allows him to take possession of the actual physical assets.

With this class of investment, an investor can leverage his investments with margins or borrow to a large extent to increase his profitability. Nevertheless, the investor also runs the risk of losing more than he gains should the price move against the investor. This is because he might be subjected to a margin call if the value of his investments falls below his margin threshold. Because trading with derivatives are highly leveraged, they are regarded as extremely risky for the novice investor as the risk factor is magnified many folds.

Gold Exchange Traded Funds (ETFs)

Gold Exchange Traded Funds are derivatives or financial instruments that track the price of gold. They trade on the major stock exchange like London, New York, Parisand Zurich. Two of the popular Gold ETFs are Streettracks Gold Shares in New York (NYSE:GLD) and the Lyxor Gold Bullion Securities (GBS:LSE) inLondon. All these gold ETFs can be traded through your stockbrokers.

Because there is a stamp duty applicable as well as a yearly administrative fee of 0.4% to 0.5%, the amount of gold backing gold ETFs will shrink by this amount. For an investment portfolio with a medium or long term aim, this method of investing in gold is an unattractive option. Furthermore, you do not have ownership or title to the underlying gold holdings. Day traders, hedge funds managers and institutional traders are the main players using this type of financial instruments for speculating on the short term price fluctuation of gold.

Read Investments in Gold – Chapter 11: Gold Stocks
Read Investments in Gold – Chapter 12: Gold Futures
Read Investments in Gold – Chapter 13: Technical Analysis
Read Investments in Gold – Chapter 14: The Motivations for investing in Gold
Read Investments in Gold – Chapter 15: Conclusion

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