Are Gold Derivatives Right for you?

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Gold derivatives can provide exposure to bullion without owning the metal itself. An appealing option for some, although not everyone sees it that way. There are, as always, benefits and drawbacks to exploring this option.

Understanding Gold Derivatives

Anyone who is interested in derivatives usually invests money for speculative purposes. A gold derivative contract is an agreement linked to the ongoing evolution of the bullion price. This is not physical gold, but only a “claim” dependent on the counter-party. From a long-term perspective, gold derivatives are not necessarily the way to go. 

Newcomers to the industry, however, can learn a thing or two from derivatives. It shows how crucial it is to assess the bullion price now, in the past, and in the future. A lot of information can be obtained from exploring and comparing these different time frames. 

For traders, speculators, and hedgers, gold derivatives can be of extreme value. Not only is it a way to leverage one’s market position, but it can also protect against potential losses. This latter option is also interesting for gold dealers, as they need to find ways to make money under any and all market circumstances. 

OTC vs Certificates

For most people, there are two different types of gold derivatives. On the one hand, there is OTC trading. Investors forge an agreement with the counter-party directly. A benefit is sealing the deal quickly, yet these contracts cannot be sold on exchanges. Always research the requirements to close or sell contracts before agreeing to this type. 

Certificates, or structured products, are another option. These are often issued by banks in batches. Every certificate has the same terms, making them appealing to large groups of investors. More often than not, such a certificate can be sold at any given moment. 

Benefits and Drawbacks

Exploring the world of gold derivatives is interesting, but nothing is without drawbacks or risks. 

As far as benefits are concerned, it is possible to leverage a position, and even make a profit when the market goes sideways. Even if the market turns bearish, one can still make money with gold derivatives if they play their cards right.

The downsides, however, include the immense complexity of these products, the issuer risk, limited liquidity and trading, and potentially high fees. Especially when dealing with bank-issued vehicles, there may be hidden costs in every nook and cranny. Relinquishing sales commissions is often a trick to charge higher fees elsewhere. 

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