In the first parts of this series on how to buy gold, we discussed three ways of investing in gold, and those are bars, coins and rounds. All those methods involve the actual possession of the gold. However, there are other ways of trading cash for gold and those are the ones that are now discussed in this continuing series on how to buy gold.
Exchange Traded Funds
Exchange-traded funds or ETFs as they are more commonly known; are one of many ways that can be used to buy and sell gold or silver. The trading of this type of products closely resembles the trading of shares on any stock exchange. ETFs unlike gold bars are relative newcomers. The Australian Stock Exchange became the first exchange in the world when it launched the first gold ETF in the world in 2003.
ETFs and other similar products represent a much more convenient way to buy gold since they do away with the requirement of actually storing the gold. Typically, an ETF will charge a trading fee as well as fees for storing, insurance and related costs. However, owing to their complex nature, inherent risks and limited ability to redeem cash for the gold, it may be advisable to read the fine print carefully before investing in them.
Derivatives earned a bad name for themselves in the wake of the 2008 global financial crisis. However, with more stringent regulations it is likely that the global derivatives market will see a rise in value.
Simply stated, a derivative contract gets its value from the performance of an underlying asset, in our case silver and gold. They can be useful for a variety of purposes including hedging against changes in commodity prices, speculation or trading in markets that have limited access. They come in different flavors including forwards, futures, options and swaps. The total size of the global gold derivatives market stands at over US$ 1 quadrillion (that is one followed by 12 zeros), and it appears that it is a growth market.
However before diving in, it would be prudent to understand the risks inherent in the derivatives market. Increasingly, many of the financial instruments developed in the financial markets are becoming increasingly complex. The world is still recovering from the effects of the 2008 crisis. The third part in this series will discuss one of the most common ways of trading in gold and that is through the buying and selling of gold futures.
Investing in Mining Companies
Rather than trade cash for gold, you can also invest in the companies that mine the gold. You can do this by investing in the stock of gold mining companies. In principle, if the price of gold goes up, the company is likely to make more money, and this would translate into higher share prices. Nonetheless, there many other factors could also intervene, including mismanagement, theft or even the real threat in some countries of nationalization. A capable gold broker would be in a position to guide you in order to reduce the amount of exposure.
One of the solutions to reducing your risk would be to trade in hedged shares. Some companies hedge the risk by as much as 18 months.
Bio: Jack is a freelance writer for BuyAndSellGoldSilver. He has written several posts on trading, investing, real estate on various bloggers. In his free time he loves to spend time with his family.
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