Gold Certificates - Gold Trackers - Gold Options and Gold Structured Products

What are Gold Derivatives?

Gold Derivatives are Contracts and nothing else than contractual agreements, linked to the development of the gold-price. Derivatives are not physical gold, but only a claim against a counter-party (broker, bank). This claim is dependent on the solvency of the counter-party. In case of bankruptcy investors have to calculate with a total loss. Hence Gold Derivatives are not recommended to invest in gold on a long term. But they offer a wide range of opportunities for short term oriented traders and hedgers, as they offer leverage or downside-protection.

 

There are two different kind of  transaction types with a wide range of designs. You can separate Gold Derivatives in:

  • OTC trades
  • Securitised certificates

On OTC trade is a so called over-the-counter trade. That means, that you as an investor go into an agreement directly with a counter-party (bank). Your the one and only with exactly this trade. The trade is not done on an exchange but directly "over-the-counter". You can not sell your contracts on a exchange are deeply dependent on your counter-party offering you the possibility to close or sell your contracts. (Example CFD-Contracts or OTC-Options)

 

In contrast to OTC's we have the Securitised Certificates or so called Structured Products. In this case a bank is issuing a series of identical certificates. All of them have the same terms. The certificate gets a security identification number and get's sold to hundreds of investors. After issuance a secondary market over the bank or the stock exchange is offered. That means that the certificates can be sold anytime during market hours.

 

Fees and costs

Certificates are not for free even though they are often offered without sales commission. The bank earns on every issuance as it constructs the certificate out of different components such as options, futures, zero-bonds by calculating profit-margin for itself. So you should compare different offers before you buy a certificate.

 

Types of Gold Derivatives

Leveraged-Products

With Leveraged-Products investors can turn a small amount into a huge sum - or into nothing. Usually (except short selling of options and futures) you can only loose as much as you invest. But if the gold-price goes into your direction, the performance can be multiplied. If a Gold Warrant has a leverage factor of 10, the certificate goes +10% for every +1% the gold-price moves (and vice versa). But if the gold-price goes sideways over a long time, the certificate will go down due to fees. That's due to a loss of time-value or negative roll-yields. Hence leveraged-products are best suited for speculative short term trading ideas and not for long-term investments.

You can either bet on rising or falling gold-prices. But Leveraged-Products can also be used to hedge an existing gold position against losses.

Option based derivatives are called Warrants. Future based derivatives are called Mini-Futures, Speeders or Turbo-Call-Warrant. Credit financed derivatives are called Contact for Difference CFD or Forwards. They all have in common to offer a big potential gain with only a limited amount of invested money.

 

Protection-Products

They have a wide range of design and names! In common they offer a certain capital protection or limited downside risk. Some of them offer a 100% capital protection as of expiry, other just a protection on the first 25% of downside. After that, you suffer the whole downside of the gold-price. As a"price" for the protection the investor is willing to accept a limited upside potential. His maximum return is defined in advance. If the gold-price is going +100%, the investor is left with a max of +5% (as an example). But they offer also a good return in sideways markets. The most common types are discount-certificates, barrier revers convertibles, capital protected notes.

 

Pros:

  • Leverage possible
  • Capital protection possible
  • Profit in sideways markets possible
  • Profit from falling markets possible

Cons:

  • high complexity
  • issuer risk (in bankruptcy total loss)
  • trading and liquidity limited
  • intransparent fee and cost structure

Gold Price History 5 years