Ways to Own or Trade Gold

What you will learn

• The main ways to get exposure to the gold price
• The pros, cons and typical costs of each route
• What counterparty risk means and where it appears
• Which routes suit long-term holding and which suit short-term trading

Explanation

Exposure means that your money gains or loses when the gold price moves. You can get exposure in several ways.

Physical gold means bars and coins that you own directly. You face no issuer that could fail, but you pay a dealer spread, and you need safe storage and insurance.

Exchange-traded products (ETPs) are securities traded on a stock exchange. In Europe, gold ETPs are usually structured as an ETC (exchange-traded commodity), which is legally a debt security, often backed by physical gold held by a custodian. Some markets also offer gold ETFs (exchange-traded funds). Read the product documents to see whether gold is held physically and whether you can ask for delivery.

Futures are standardised exchange contracts to buy or sell a fixed amount of gold at a future date. A widely used US gold futures contract covers 100 troy ounces; smaller "micro" contracts also exist. Futures use margin (a deposit that is only a part of the contract value), so they are leveraged.

CFDs (contracts for difference) are agreements with a broker to exchange the price difference of gold between opening and closing. You never own gold. CFDs are leveraged and you pay financing for positions held overnight.

Mining shares are shares of companies that mine gold. They are influenced by the gold price, but also by costs, management, debt and country risk. They can pay dividends but may move very differently from gold.

Counterparty risk

Counterparty risk is the risk that the other side of a contract cannot meet its obligations. With an ETC, it relates to the issuer and custody structure. With a CFD, your counterparty is the broker. With futures, a central clearing house stands between buyers and sellers, which reduces this risk but does not remove broker risk.

Worked example

Hypothetical example: Ben wants to hold €5,000 of gold for one year and compares two routes. The gold price ends exactly unchanged.

Assumptions: coins bought 3% above and sold 2% below the market price; ETC annual fee 0.25%; ETC order fee €5 per trade. Taxes and exchange spreads on the ETC are excluded.

1. Coins: costs about 3% + 2% = 5% of €5,000 = €250 for the round trip.
2. ETC annual fee: €5,000 × 0.25% = €12.50.
3. ETC order fees: €5 × 2 trades = €10. Total ETC cost: €12.50 + €10 = €22.50.

For a one-year holding, the ETC is cheaper in this example. For a very long holding, the coin spread is spread over more years, while the ETC fee repeats every year. Storage for coins would add further cost.

Common mistake

Practice activity

For each person, choose the most suitable route and give one reason: (a) Clara wants to hold a few coins at home for many years; (b) David wants to trade small short-term moves and also go short; (c) Eva wants low-cost exposure in her normal securities account.

Limitations: Real fees, spreads and product structures vary widely between providers.

Key takeaways

• Physical gold has no issuer but costs money to buy, sell and store.
• ETCs are convenient but carry issuer and custody structure risk and an annual fee.
• Futures and CFDs are leveraged trading tools and can lose money quickly.
• Mining shares are company investments, not a pure gold exposure.

Next step

In the next lesson you will calculate in detail how spreads, storage, fees and financing reduce returns.