Research & Blogs
How to Navigate the Many Forms of Gold Investment
Gold is accessible in different forms the world over. When it comes to jewelry, which in any given year can account for around 50% of gold demand1, the various forms gold can take are ‘on display,’ often quite ornately in countries where gold plays an important cultural role, such as in India, China, and Turkey. Similarly, gold bars can come in different shapes, sizes, and weights. Accessing gold in financial markets, whether for the purpose of a store of value, for portfolio diversification, or as a potential inflation hedge, can take many different forms, too. What follows is a brief overview.
What is the “Gold Market”?
The ‘gold market’ you often hear about in the context of a financial market usually refers to the over-the-counter (OTC) market. The gold market isn’t limited to a specific geographic location, like, say, the New York Stock Exchange on Wall Street, but it is instead truly international insofar as it functions relatively seamlessly across most global time zones. The main participants in the OTC market include financial institutions, such as commercial and investment banks, and ‘professional’ investors. Practices are overseen and regulated by financial authorities in local jurisdictions. Market participants adhere to rules of conduct as well.
The OTC Market
A typical transaction in the OTC market transpires as an exchange of cash for physical gold (or vice versa) at an agreed-upon price for settlement in two days, also known as spot value. The spot price can vary from second-to-second depending on many factors, such as economic data or breaking news that might affect perceptions of the demand for and/or supply of gold. This differs from the ‘fixing price,’ which is determined twice every business day (at 10:30 and 15:00 UK time, in US dollars2) by auction at the London Bullion Market Association. While the LBMA fixing often serves as a benchmark for gold-related transactions, the spot price is a barometer of gold’s value in real-time.
Gold Forward and Options
Gold forwards are a product in the OTC gold market that facilitates settlement at a date other than spot. Gold forwards, aka swaps, can also be traded as a standalone product. Like FX forwards, gold forwards formulaically incorporate relative interest rates, storage costs, and a specified time frame to give ‘points’ that are either added to or subtracted from the spot price to adjust for the non-spot settlement. Options are also available in the gold OTC market. Calls and puts on the gold price confer the same rights (to the buyer) and obligations (for the writer) as do calls and puts on single-stock equities. Like trade size and settlement date, option parameters (strike price, etc.) are customizable in the OTC market.
Exchange-based products are the other principal means by which exposure to gold can be accessed (or hedged) in financial markets. Futures contracts, such as those listed on the Chicago Mercantile Exchange or the Shanghai Futures Exchange, are standardized in several respects (e.g., notional, expiration date, etc.)3 Gold futures market participants include the entities and ‘professional’ investors involved in the OTC gold market as well as a cadre of speculators, who, aside from seeking to profit from moves in gold prices, also provide market liquidity by underwriting risk. Gold miners can also avail themselves of the OTC or gold futures markets to achieve a degree of price certainty vis-à-vis their production. There are also exchange-based gold options, which are similar to OTC gold options except that listed gold options can be exercised for gold futures, whereas OTC options are exercisable into physical gold. In practice, however, both gold futures and options are normally liquidated or rolled over before stipulated expiry dates.
Exchange-Traded Funds – Gold ETFs
The launch of the first exchange-traded gold fund (ETF) in 2004 opened an avenue of access to gold in securitized form. A gold ETF buyer is purchasing shares in a trust that tracks the price of and is mostly backed by physical gold. Gold ETFs trade on exchanges in the US and elsewhere; they can have different characteristics and regulations. Gold ETFs are credited with broadening the investor base, not only to those entities precluded by mandate from holding either physical gold or gold futures but also to retail investors. While jewelry-related demand for gold usually exceeds other types of gold demand annually, in 2020, investment-related demand across the products and markets described herein exceeded all other categories.
Digital Gold Products
Gilded provides digital access to real physical gold through our digital platform. Gilded offers direct and reliable ownership of gold using blockchain technology (and digital receipt) in compliance with applicable regulations. To ensure the security and integrity of its users, all customers within the Gilded platform must first earn approval through a thorough AML/KYC identity verification process. Furthermore, the record of ownership of gold purchases is reliably stored within Gilded’s private and permissioned blockchain. With digital gold, Gilded clients have all the immediate benefits of physical gold ownership minus the hassle of transporting, storing and insuring the gold. The gold that you purchase is yours. Gilded clients hold title to the gold, minimizing counterparty risk or reliance on a manager, company executive, or trustee. We are working to enable you to sell, send, pledge, or borrow against the gold in your possession from anywhere, 24/7. With Gilded, you also create an opportunity to earn a return on your gold, and soon within the Gilded platform, you may even be able to swap the gold in your possession for other gold bars, which you can review as a tax harvesting opportunity with your tax professional. Additionally, if you prefer to hold the physical gold in person, you can arrange to have the gold delivered. Digital gold has taken a formerly cumbersome asset and brought it into the digital age in style with cutting-edge technology and many years of experience working hands-on with the precious yellow metal.