Many investors want exposure to gold to hedge against inflation or market instability, but holding physical gold comes with certain downsides. Physical gold needs to be transported and safeguarded, and you might also want to insure it. When it is time to sell it, you need to find a buyer who is actually interested in owning physical gold, and then transportation must be arranged again.
It is therefore understandable that some investors chose to get exposure to the gold price in other ways than keeping gold bullions in their own safe. Below, we will take a look at a few options.
Gold receipts
A gold receipt can be redeemed for physical gold.
To understand what a gold receipt is, we need to take a look back into the past. Before the advent of modern banking, goldsmiths were known to store gold on behalf of other members of the community. After all, the goldsmith had already take the necessary precautions to safely store the gold he was working on, so it made sense for him to also offer storage. The owner of the gold would bring the gold to the goldsmiths, and get a receipt in return. That receipt needed to be handed over to the goldsmith to get the gold back.
Eventually, enterprising goldsmiths realized that it was possible for them to keep less gold on hand than what they had issued receipts for. After all, it could take years before a depositor asked for their gold back. Therefore, some goldsmiths developed a type of fractional reserve credit system.
The receipts themselves also became a handy thing to have, since they were essentially gold-backed paper money. If you were about to pay someone with gold, why bother to take it out from the goldsmith? If you both trusted the goldsmith and believed that he would honour the receipt in the future, why not just let the receipt change hands?
Today, you are not likely to find a local goldsmith willing to store your gold, and most government mints have also stopped offering gold receipts. What you can do is turn to one of the private companies that offer this service. Since we are now in the 21st century, many of them offer electronic tradable receipts (ETRs) which are backed by their vaulted gold. You don´t actually have to bring any physical gold to them; you just make a money transfer and get the electronic receipt in exchange. These ETRs can be traded.
Gold forward contracts
Gold forward contracts tend to be highly customized to fit the exact needs of the parties. Therefore, they are not suitable for exchange-trading, since that require highly standardized contracts. Gold forward contracts are still traded, but over-the-counter (OTC).
Gold futures contracts
Gold futures contracts are similar to forward contracts, but standardized exchange-traded gold futures contracts exist and make it easy to gain exposure to the gold price without holding physical gold.
Most gold futures contracts (including all of the exchange-traded ones) are not settled by delivering actual gold. Instead, they are settled by a money transfer. In some cases, you also have the option to rolled it over to another gold futures contract with a later expiration.
Gold options
A gold call option gives the holder a right, but not any obligation, to buy gold from the issuer at a pre-specified price, in accordance with the rules stipulated in the gold call option contract.
A gold put option gives the holder a right, but not any obligation, to sell gold to the issuer at a pre-specified price, in accordance with the rules stipulated in the gold call option contract.
If being able to sell or buy actual gold is important to you, make sure you get the right kind of gold option, because most of them are only cash-settled. A cash-settled gold option will give you exposure to the gold price, but you only have a right to a cash settlement – you don´t have any right to actually sell or buy gold.
Gold funds
If you want someone else to handle the day-to-day investment decisions, you can invest in a gold fund. Some gold funds own physical gold, while others use derivative (gold options, etc). There are also funds that invest in stock companies in the gold mining industry to get exposure to the gold price.
Exchange-traded funds (ETF:s)
The shares of an exchange-traded fund (ETF) are listed on an exchange, which makes them very straightforward to buy and sell, and there is typically a lot of liquidity. Buying and selling ETF shares is very similar to buying and selling shares in a public stock company.
One example of a gold ETF is the SPRD Gold Trust ETF (GLD), which is traded as NYSE Arca. The investment objective for this fund is to track the performance of the gold bullion price.
An ETF that works differently is ProSHares Ultra Gold (UGL). The shares are traded on NYSE Arca just as for GLD, but UGL is a leveraged gold ETF with 2-times long exposure.
Shares in gold mining companies
Investing in a gold mining company will give you exposure to the gold price, but with some caveats. There is no guarantee that the share price will follow the gold price, since your exposure is indirect. It is for instance possible for a mining company to be mismanaged, and this can impact the share price negatively even if the gold price is increasing. An individual mining company can also suffer from issues that do not impact other mining companies, e.g. political violence in a specific mining area, an accident in a particular mine, labour strikes, etcetera.
Important: Many gold mining companies hedge their exposure to the gold price to reduce risk. A higher gold price might therefore not have the strong and quick impact on the balance sheet that you were wishing fore.
It is also good to know that some gold mining companies are involved in more than just gold mining, so you may get exposure to other commodity prices.
Examples of gold stocks
AngloGold Ashanti Ltd. (AU)
Asante Gold Corp. (ASE.CX)
Barrick Gold (ABX) and Kinro
Calibre Mining Corp. (CXBMF)
Coeur Mining Inc. (CDE)
Dundee Precious Metals Inc. (DPM.TO)
Equinox Gold Corp. (EQX)
i-80 Gold Corp. (IAUX)
Kinross Gold (KGC)
Lundin Gold Inc. (LUG.TO)
OceanaGold Corp. (OGC.TO)
OceanaGold Corp. (OGC.TO)
Osisko Mining Inc. (OSK.TO)
Perseus Mining Ltd. (PRU.TO)
Sibanye-Stillwater Ltd. (SBSW)
Torex Gold Resources Inc. (TXG.TO)
Wesdome Gold Mines Ltd. (WDO.TO)
Gold mine ETF
If you don´t want to invest directly in gold mining companies, you can go for an exchange-traded fund that invests in basket of gold mining company shares. It can be a good way of spreading risk and diversifying if you only have a small capital to invest. One example of an ETF that invests in gold mining companies is the Market Vectors Gold Miners (GDX), which is traded on NYSE Arca.