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Gold commodities have a unique place in the investment world. Accordingly, they have a unique place in the portfolio of institutional and individual investors alike. Gold, though only modestly used in industrial applications, is recognized worldwide as a true form of currency. A universal store of value, it functions as a hedge against inflation, protection against failing fiat currencies, and excellent investment vehicle for multiplying wealth. As you’re about to see, you have far greater options than just a plain vanilla bullion fund.
Gold Commodities As A Face In The Crowd
Gold commodities are a great way, even for individual investors, to play the gold market for protection and profit. There are more ways to participate in gold than ever before in history. You can purchase gold online through various storage programs. There are certificate programs, such as the Perth Mint Certificate program, that is actually government backed thanks to the state of Western Australia. You always have mutual funds, as well as bullion funds. There are ETFs tied to gold, as well as ETFs anchored to gold mining stocks. You can just go buy gold bullion at a coin or pawn shop, as well as from various bullion dealers. Then there are gold futures contracts.
Gold Commodities Are Now Available To Anyone
Gold commodities, in the form of futures contracts, have previously been construed as an investment vehicle best suited for money managers and hedge fund gurus. That’s if they were even thought of or slightly understood at all. These days, along with the deluge of gold products, futures contracts are accessible, indeed geared toward, individual investors looking for creative ways to leverage their investment.
Gold Commodities Put Liquidity On Your Side
Few people realize just how remarkably liquid gold commodities are. COMEX gold futures have an average daily trading volume of nearly ten times that of the GLD (SPDR Gold Shares ETF). This is noteworthy, as most people would never even pause to question the liquidity of the GLD ETF. With about twenty million ounces of gold traded daily, there’s plenty of buying and selling to accommodate your needs. On top of the 20,000,000 ounces or better traded daily, there are more than 50,000,000 ounces in open positions.
To further elucidate this issue of size, as it relates to liquidity, consider the estimated worldwide gold reserves. Suspicions put the world gold reserves at approximately 130,000 metric tons. Now, the SPDR Gold Shares ETF has as its purpose the ability for folks to exploit an inexpensive alternative to owning gold and storing it at home. So, GLD uses fund proceeds to buy and warehouse gold bullion. To the end, each share is equated with one-tenth of an ounce of gold. The ETF began in 2004 and now has tens of billions of dollars under management. While that sounds like a lot, there are maybe a couple thousand metric tons of gold stored in reserve. When compared to the expected 130,000 metric tons in existence, even 5,000 metric tons wouldn’t be all that much by comparison. In fact COMEX gold futures may have as much gold in open positions at any given time as GLD has total in storage.
Gold Commodities Yield Leverage For Those Who Want It
As a general rule, gold futures offer an opportunity for leverage that is unparalleled, and certainly not found in ETF gold investments. For instance, consider that stocks and ETFs don’t really offer leverage of the kind I’m referring to. Now, you may be able to find brokers who loan half of the money needed to buy stocks and ETFs. However, of course, that comes with a cost.
What’s unique about gold futures is that every contract comes “pre-loaded” with the ability to use leverage. It’s all part of the system of margin rules and regulations. The minimum margin requirements are passed through from the brokerages to the end of the line client. The brokerages manage the daily margining requirements for you. This could be as low as just 3% of the notional value of the underlying contract at issue. This opens the door to exploit market moves that you anticipate.
There is a key difference to keep in mind as well. Margin, as associated with stocks, represents a partial payment towards the acquisition of the stock. Oppositely, with futures the margin is more like earnest money or “good faith money.” The purpose is not to make a down payment, but rather to demonstrate the financial wherewithal to perform the contract in play. It also substantiates that someone can weather the storms of day to day volatility of gold itself.
Leverage is easy to use with gold commodities, as the brokerage is constantly monitoring the margin balances and updating the account balances. At the end of each day you know exactly where you stand. When the markets change, and the margin requirements follow, the bottom line is that you’ll not need to borrow the broker’s money to handle it. Moreover, there are no fees affiliated with margin of this type relating to gold commodities.
