Gold is the go-to investment when market volatility causes investor confidence to be shattered because, as they say, all that glitters is gold. In the past, during some of the worst market crashes, the price of gold has risen, serving as a sort of haven. The precious metal's negative correlation with the stock market is the cause of this.
Another aspect that adds to gold's attraction is its physical abundance, which eclipses demand on a global scale. According to the World Gold Council, finding new gold deposits and putting new mines into operation takes a very long period.
What happens if you decide not to invest in the material object or are unable to? In terms of cost and convenience, investors have many possibilities. These include gold futures and exchange-traded funds (ETFs).
Comparison between gold ETFs and futures
Commodity fund investments, such gold exchange-traded funds (ETFs), trade like stocks and have gained some popularity. Investors do not actually own the metal even though their investments are composed of assets that are backed by gold. Instead, their portfolio is more diverse because they have a small quantity of gold-related assets. These products often provide investors with exposure to gold through smaller financial commitments than what is feasible through physical investments and futures contracts. However, many investors might not be aware that the expense of trading gold-tracking ETFs may outweigh its convenience.
On the other hand, gold futures are contracts traded on exchanges. Each party agrees that the buyer will acquire the product at the agreed-upon price on the future date that has been stated. Investors are not required to contribute their full capital at once. Therefore there is considerable flexibility in the timing and form of the transaction.
Gold ETFs
The first US exchange-traded fund (ETF) intended specifically to track the price of gold was introduced in 2004.
The SPDR Gold Trust ETF was marketed as a more affordable alternative to buying gold futures or owning gold. The initial gold ETF, however, debuted in Australia in 2003. ETFs have grown in acceptance as an alternative since they were first introduced. ETF shares can be purchased through a brokerage firm or fund manager like any other stock.
Because of this, capital gains taxes on long-term investments in gold ETFs—those lasting a year or longer—are relatively high. Investments in commodities are subject to a maximum rate of 28% as opposed to most long-term capital gains, which are subject to a maximum rate of 20%. Despite their differences, gold futures and gold ETFs offer investors the option to diversify their holdings in the metals asset class.
Gold Futures
Gold futures, as was previously stated, are exchange-traded contracts in which a buyer agrees to purchase a specific quantity of the commodity at a specified price at a future date.
Hedgers frequently utilize futures contracts to control and lower commodity price risk. Through futures contracts, dealers can trade without any physical backing.
Investors can have long or short positions in futures contracts. A long-term investor will purchase gold in anticipation that the price will rise. The investor is required to take delivery of the metal. In a short position, the investor sells the asset intending to buy it back later at a lower price.
Gold futures are less complicated than relevant ETFs. Investors are free to buy or sell gold as they see fit. Investors have complete ownership of the underlying gold, no management fees, a split of capital gains taxes between short- and long-term gains, and no outside parties making investing choices on their behalf. Last but not least, thanks to margin, a $1 investment in gold futures may be worth $20 or more in actual gold.
Comparison between gold ETFs and futures
If gold were trading at $1,000, one ounce would be equivalent to a $1,000 investment in an ETF like the SPDR Gold Shares (GLD). For the same $1,000, a trader might purchase an E-micro Gold Futures gold contract equivalent to 10 ounces.
The drawback of this type of leverage is that 10 ounces of gold can determine whether investors win or lose money. Given the leverage and regular expiration of futures contracts, it is understandable why many investors opt to invest in ETFs rather than carefully reading the tiny print.
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