Gold is one of the most popular commodities worldwide!
It is used for many reasons such as an investment, jewellery, dentistry and even for medical equipment.
One of the main reasons for its popularity though is that it is a great way to hedge when the financial markets are facing times of uncertainty and also in times of high inflation.
Many people who are unaware of the financial markets might think that the only way they can go about investing into gold is buy physically purchasing it through brokers.
Although this is a popular method of speculation by the private investor, many people and larger institutions use financial derivatives to trade the gold price.
What Is a Financial Derivative?
A derivative is a financial instrument that tracks the price of an underlying asset. It is possible to trade such an instrument without taking ownership of the asset which can lead to such benefits as not having to store the asset and in many instances, substantial capital gains tax savings.
Examples of Derivatives
Some of the most popular derivatives are:
With options, you are given the opportunity, but not the obligation to purchase a set amount of gold within a specific time scale.
Of course having this flexibility comes at a price and the option broker will charge a premium on each and every trade you place which is built into the price you pay.
Options are a great instrument for those people that like the sounds of unlimited gains with set risk.
A CFD is a simple contract between an individual and a broker that states that one party must pay the other the difference between the price when the contract is opened, and when it is closed.
They are at their most popular within such countries as the UK.
Exchange Traded Funds
ETFs allow the trader/investor to speculate on an entire index of stock/shares.
They are very similar to mutual funds but are more accessible to many as the minimum amount required to invest is far less.
Why not Simply Purchase Gold?
The problem is that when you buy gold, you need somewhere to keep it.
This required vaults that can be very expensive as well insurance, in the event that it is stolen or something else happens to it.
These are costs that can easily be avoided by trading gold using any one of the derivatives listed above.