2.1 Physical Gold vs. Gold Securities

Because gold is a commodity, there are two ways to trade the precious metal: physical gold trading, or trading in gold securities. 

What is physical gold trading?

Simply put, physical gold trading involves buying and selling gold in its physical form, aka gold bullion. The most standardised types of gold bullion for trading are bars, ingots and coins vast from investment-grade gold – gold that is at least 99.5% pure. ^[1]

Trading gold bullion is typically carried out at the current market price of the commodity (spot price), and fees may be involved, such as brokers’ fees, or fees for storage. 

A secondary method of trading physical gold is to purchase gold jewellery. Note that gold used in jewellery may be of lesser purity than investment-grade gold. 

At the highest purity, gold is soft and malleable, making it unsuitable for everyday wear. Hence, the most common purity in gold jewellery is 18K (75% gold, 25% alloyed metals), as this combination produces sufficient hardness for everyday wear. Increasingly, 22K gold (92% purity) is also being used by jewellers, but this is still under the 95% purity required for investment-grade gold. ^[2]

The lower purity of gold used, and workmanship and sales fees that are typically charged, will affect the investment returns of gold jewellery. Thus, if your primary aim is investment, investment-grade gold bullion would be a more suitable choice.

What is gold securities trading?

Gold securities trading is a term used to describe gold trading that extends beyond the physical metal itself. Examples of gold securities include ETFs that track the price of gold, stocks and shares of companies involved in gold mining and production, and even gold-linked derivatives such as gold futures and gold CFDs.

As such, gold securities trading offers investors a wider range of options to gain exposure to the price action of gold. The array of different instruments also enables gold traders to deploy more bi-directional strategies for greater profit potential.

See the following sections for more detailed discussions on the various types of gold securities. 

2.2 Gold ETFs and mutual funds ^[3]

There are a variety of gold investment funds that investors can choose from, including gold ETFs and gold mutual funds.

Gold ETFs are commodity funds that are tradable on stock exchanges, just like stocks. Typically, gold ETFs are passively managed funds that track the spot price of gold or an index that tracks the spot price of gold. They are popular for their low expense ratio and fuss-free approach enabling inventors to potentially benefit from capital gains when the price of gold increases. 

On the other hand, gold mutual funds tend to be actively managed investment funds that offer exposure to gold-backed securities. Some examples include stocks of gold mining companies, gold futures and other markets related to gold. Mutual funds are commonly more expensive than ETFs as they are composed and adjusted based on the analysis and forecast of a team of fund managers. But in return, gold mutual funds offer a higher degree of diversification, as they are based on more than just the spot price of gold. 

Another difference is that mutual funds can only be traded once, at the end of the trading day, based on the net asset value. In comparison, gold ETFs can be traded multiple times throughout the trading day. 

It is important to understand that the line between mutual funds and ETFs has been considerably blurred, given the rise of passively managed index mutual funds as well as actively managed gold ETFs. Hence, traders should study the fund’s prospectus carefully to determine if a gold mutual fund/ETF fits their goals and objectives. 

Read more about ETFs vs mutual funds. 

2.3 Gold stocks and mining companies 

Another popular category of gold trading revolves around gold stocks and gold mining companies. 

Publicly listed gold mining companies are sought after by gold traders who invest in their stocks as a way to gain diversified exposure to the gold markets. As demand for gold increases, so does demand for gold mining companies, leading to an increase in their share prices. 

Besides gold mining companies, gold stocks also include stocks of companies involved in other areas of gold production and not just mining. Some examples of such companies include gold streaming companies. These enterprises play an indirect role in gold mining, acting as financiers and fund provisioners to gold miners. 

Additionally, gold stocks may also include gold jewellers. Stocks of publicly listed jewellery companies can also benefit during times of high gold demand. 

2.4 Gold Contracts for Difference (CFDs)

Contracts for Difference (CFDs) are a type of financial derivative that offers indirect exposure to the price action of gold. Unlike gold bullion trading or gold funds that include physical gold holdings, there is no need for direct ownership of the commodity itself. 

Gold CFDs offer several benefits to investors aiming to trade the price action of gold. One is the ability to start trading with very little capital, as there is no need to match the spot price of gold. Another is the ability to trade on leverage, which allows investors greater capital efficiency while potentially increasing profits from winning trades. 

With leverage, the opposite also applies. Should your trade go against you, your losses will be amplified. This makes it possible for a losing trade to wipe out or even exceed your capital. 

How does gold CFD trading work?

Gold CFDs are agreements between a gold trader and a CFD broker to exchange the difference in the price of gold between the beginning and the end of the agreement. When the CFD is closed, the difference in price, if any, is settled up directly between the trader and the broker. No actual gold is exchanged between the two parties. 

In essence, gold CFDs allow investors to speculate on the price of gold. Traders can open a contract going either long or short, and the CFD broker takes the counter position. The CFD lasts until the trader closes the contract, at which point the outcome of the contract is determined by the price of gold at the close.

Adding another layer of complexity, there are gold CFDs based on gold futures price, which is another derivative that is primarily used for hedging purposes. Gold futures contracts are agreements between a trader and a futures broker to exchange a certain quantity of gold at an agreed price on a predetermined future date. There are also some variations of gold futures contracts that do not have expiry dates.

To keep the material concise, we will only be discussing gold CFDs trading, and not gold futures CFDs trading. 

Example of gold CFD trading

Let’s assume the current price of gold is USD 2,293.50 per kg. You believe the price of gold will soon go up, so you decide to open a long position on a mini contract, which equals a USD 10 movement per one dollar movement in gold. (There’s also a maxi contract, which provides USD 10 movement per one dollar movement in gold.)

A week later, the price of gold rose to USD 2,343.50 per kg. Thus, your long trade worked out in your favour, and selling your contract nets you a profit, as follows:

• Difference in gold price from open to close of CFD: (2343.50 – 2293.5) = 50
  
• Since you traded a mini lot, where a dollar’s gold price movement results in USD10, your profit = 50 x USD10 = USD 500

In this example, you’ve made a profit of USD 500 from one mini contract. If you had opened multiple contracts, let’s say 5, your profit would be USD 500 x 5 = USD 2,500.

Of course, the opposite happens if you take the wrong side of the trade. For example, if the price of gold fell by 30, your mini-contract would have generated a loss of USD 300 per contract. 

Benefits and drawbacks of gold CFDs trading

The advantages of trading gold using CFDs include convenience, capital efficiency and flexibility. 

As there is no need to take ownership of physical gold, gold CFD traders do not have to make provisions for custody and storage of the precious metal. CFDs may be traded using leverage, which allows traders to begin trading with a smaller capital, compared to trading physical gold bullion, where you’ll need to pay spot prices. 

Additionally, CFDs are a flexible instrument as you can choose to go long or short on the price of gold. While often short-term in duration, gold CFDs can be held for as long as you want, so you have greater choice in expressing your view of the market. 

However, gold CFDs aren’t without their disadvantages. Primarily, gold CFDs are an advanced strategy, and may not be suitable for everyone, especially those completely new to trading. Also, leveraged CFD trades amplify losses as they do wins, and proper trade sizing is necessary. 

If you have contracts open during periods when there are large changes in the price of gold, you may face margin calls, which require you to deposit additional funds. Otherwise, you may be forced to close your trades at unfavourable times.

2.5 Gold Certificates and Accounts 

Let’s take a look at two other ways of investing in gold that are less common – gold certificates and gold accounts. 

Gold certificates ^[5]

Gold certificates are certificates issued by banks or gold dealers certifying ownership of a certain amount of gold. They can be exchanged for gold, or the equivalent value in cash, and facilitate investing in gold without having to manage storage of the precious metal.

First introduced in the 17th century, when currency was tied to the value of gold, gold certificates acted as early forms of bank notes. Today, not all gold certificate programmes are reputable, due to issues like poor record keeping, duplication, or even downright fraud. 

This has given rise to criticism of gold certificates, a majority of which is based on unallocated gold. This means there may be multiple owners claiming the same physical  batch of gold – creating situations in which genuine ownership cannot be reconciled. 

Hence, investors should take care to choose reputable gold certificate issuers that are properly regulated by suitable authorities. 

Gold savings accounts ^[6] 

Some banks offer gold savings accounts that allow you to buy, hold and sell gold with just a digital account. Gold holdings in your account are recorded in grams, and you’ll need to adhere to minimum transaction quantities as determined by your bank. 

Gold savings accounts offer more flexibility and convenience as you do not need to pay for custody or secure storage. However, you may still have to pay a service charge, typically based on a percentage of your gold holdings. 

Time’s up

Module recap

• There are two ways to trade gold – trade physical gold, or trade gold securities. 
  
• The most popular form of physical gold for trading is gold bullion, which comes in bars, ingots and coins. Investment-grade gold must be at least 99.5% pure.
  
• Gold jewellery can also be considered a form of physical gold trading. However, pure gold is too soft and malleable, making it suitable for everyday wear. Hence, gold used for jewellery is often mixed with other metals; this impacts the investment value of gold jewellery. 
  
• Gold securities trading expands the scope beyond physical gold. It includes gold stocks, gold ETFs, and even derivatives like gold CFDS and gold futures. 
  
• Gold stocks are stocks of publicly listed companies involved in the mining and production or gold, or the financing of such activities. Listed jewellers may also be considered as gold stocks. Gold stocks often do well when demand for gold increases.
  
• Gold ETFs and mutual funds are investment funds that track the price of gold itself, or track the performance of a basket of gold stocks. 
  
• Gold futures allow hedging against future price swings of gold. Meanwhile, gold CFDs allow speculation in the price of gold, providing opportunities to potentially reap returns from both upswings and downtrends in the gold market. 
  
• Lesser known methods of investing in gold include gold certificates and gold accounts. 
  
• Gold certificates are issued by banks, certifying ownership of a quantity of gold. A valid gold certificate may be cashed in, or redeemed for gold bullion. 
  
• Gold saving accounts allow investors to buy, hold and sell gold electronically without needing to take delivery or store physical gold. Gold holdings are recorded in grams, and gold purchases may be bound to minimum quantities. 

References:

1. “How To Start Investing In Gold: A Beginner’s Guide – SC.com”. https://www.sc.com/sg/wealth/insights/how-to-invest-in-gold/.
2. “A Guide To Gold Jewelry: 14, 18, 22, Or 24 Karat Gold? – Brinker’s Jewelers”. https://www.brinkersjewelers.com/blog/guide-gold-jewelry-14-18-22-24-karat-gold/.
3. “Gold Fund: What It Is, How It Works, Example – Investopedia”. https://www.investopedia.com/terms/g/gold_fund.asp.
4. “7 Best-Performing Gold Stocks: June 2024 – NerdWalltet”. https://www.nerdwallet.com/article/investing/best-gold-stocks.
5. “Gold Certificate – BullionVault”.  https://www.bullionvault.com/gold-guide/gold-certificate.
6. “Gold and Silver – UOB”. https://www.uob.com.sg/personal/invest/goldsilver/overview.page.