Gold as a real and financial asset

Traditionally, commodities have been more difficult to invest in because of the complex way in which they trade through the futures and options markets. In other words, an investor can't just buy a barrel of oil. So, investing directly in commodities, such as gold or oil, tends to be more difficult for individual investors than buying, for example stocks and bonds. An essential reason for this is that stocks and bonds are readily transferable and easily accessible to the average investor.

All we know gold as a real asset - to produce some commodities (jewelry and some others, which consist of gold). But also gold is a financial asset, because we can invest in gold. There are three choices to invest in gold: to purchase the physical asset, to buy units of ETF that replicates the price of gold or to trade futures and options in the commodities market.

Derivatives

Derivatives markets use gold as the underlying asset and are contracts that allow for the delivery of gold at some point in the future.

• -    A forward contract on gold gives the owner the right to buy physical asset at some point in the future at a price fixed today. These contracts are traded over-the-counter (OTC), and can be customized between the participants (the buyer and seller) to arrange some terms of the contract: expiration and nature of the underlying asset (how many ounces of gold must be delivered and at what location).

• -    Futures contracts operate in much the same way as forwards. The first difference between these contracts is that futures are traded on an exchange. So the terms are predetermined by the exchange and not customizable. And the second one is that forwards expose each side to credit risk that the counterparty may not deliver. Exchange traded futures eliminate this risk.

• -    Call options can also be used to gain exposure to gold. But unlike a forwards and futures, call options give the owner of the contract only the right to buy physical asset, not the obligation. Because of this call option is exercised when the price of gold is favorable. If the price of gold is higher than specified price, the owner will make a profit.

Gold funds

For the average investor, derivatives markets are unaccessible. Instead, a mass investor can gain exposure to gold due to mutual funds that buy gold, gold ETFs which are traded like shares on stock exchanges.

Mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.

Exchange traded funds (ETF) replicate the movements of the underlying commodity, giving investors direct exposure. For example, the street TRACKS Gold Shares (ticker symbol GLD) trades on the New York Stock Exchange. This investment product is one of the easiest and least expensive ways to access the gold market.

Table 1 - The list of all Gold ETFs traded in the USA [1]

Holding physical gold, however, can be costly. Fortunately, there are several ways to own gold without keeping a physical asset. Gold derivatives and mutual funds/ETFs are sustainable strategies to gain such exposure.