If you aren’t much interested in purchasing physical gold, you can take a different approach and purchase the shares of the mining companies that produce gold. This is one way that you can cut out a lot of work and hassle on your part. In the event that the price of gold increases, you can surely expect that the profit margin of the company will rise; consequently, the worth of the company as well as the share price will increase. However, this may not be the case always.
As a result, there are quite a few factors that you should think about thoroughly and take into consideration while buying the share of a gold mining company. Prices aren’t the only instances that you should concern yourself with. You will also have to worry about structural failure, flooding and subsidence in the mines. Management is yet another aspect that you will need to worry about when you purchase gold mining companies. When the company or situation is handled or managed in the improper way, you could face negative publicity, along with theft and corruption. In such cases, the unhedged gold shares might be even more volatile than the gold price itself. Hence, it’s in your best interest to plan and prepare well before investing in gold mining companies.
There are three types of derivatives that you should make yourself familiar with. These derivatives are gold options, forwards and futures. You can trade them on different exchanges all around the world. You can also trade them over the counter, also known as OTC, and it goes directly to the private market. In the United States, COMEX (New York Commodities Exchange) and Euronext.liffe are the major market of trading gold futures. As far as India is concerned, these futures are exchanged in NCDEX (National Commodity and Derivatives Exchange) and at times, MCX, which is Multi Commodity Exchange.
In 2009, many gold future holders from COMEX had experienced a lot of issues in the delivery of their precious metals. A few issues in this situation included unnecessary delivery delays and delivery of bars not matching with serial number and weight written in the contract. Due to these issues, concerns rise that COMEX may not have enough inventory to back up its receipts in the market.
Many companies from the UK, Hong Kong, Portugal, Germany offer CFD (contract for difference) and spread betting on gold price. In case of CFD, the seller pays the buyer the difference between the present value of the gold and its value at the contract time. The situation is reversed, if the difference comes to negative figure; in that case, the buyer is required to pay to the seller.
Spread betting mirrors the CFD in many ways; it is a particular type of wagering where the pay-off is determined based on the precision of the wager which is quite different from a simple win/loss situation. While investing in gold, derivatives, CFDs and spread betting might be very lucrative option if you don’t want the physical ownership of gold. However, they are very risky to invest in and you must be aware of that.