In Part I of this article, we wrote about how you can invest in physical gold and set up a gold savings account. For those who do not want the hassle of safe-keeping their prized gold possessions, a simpler way is to buy “paper gold”.
Similar to buying stocks, you can trade gold virtually. Thanks to the popularity of this product, there are a number of instruments that allow you to invest in them. Here are 4 ways:
4) Gold Exchange Traded Funds (ETF)
Gold ETFs track the movements of the underlying gold price. ETFs work quite similar to shares-trading. You buy a share of the stock/gold which is available for trading on an exchange, with each share priced at the price of 1/10th an ounce of gold.
The biggest gold ETF is SPDR Gold Shares and trades on the Singapore Exchange.Investing in Gold ETFs is a quick and easy way for an investor to gain exposure to the gold price. The SPDR holdings are backed by gold and one can easily check the changes in gold holdings.
There is no expiry date to the shares you hold and they trade just like shares, so it is easy for those with shares trading knowledge to get into.
Typically a small commission of 0.2% is charged for trading in gold ETFs and a small annual storage fee is charged. In Singapore, you can also use up to 10% of the investible savings in your CPF to invest in gold products.
5) Gold Futures
Gold futures contracts trade on various exchanges and are financial commitments to make or take delivery of a specified contract of gold on a prescribed date at an agreed price.
Futures contracts are traded on margin – investors put up around 2-5% of the contract amount upfront to initiate a trade.
Futures are considered leveraged products and are thus suitable for those who have some trading knowledge and monitor their investments actively.Due to its leveraged nature, profit and losses are magnified accordingly. One advantage of trading gold futures is due to its liquidity and competitive bid-ask spread.
However, do take note of key events such as quantitative easing or important economic data out of U.S that may swing gold prices in a volatile manner.
6) Gold Stocks
Gold stocks are shares in gold mining companies. If the gold price rises, profits and the corresponding share price of a gold mining company should likely rise.
However, there are many other factors that affect the share price of a company. This can include costs of production (such as crude oil), labour costs, supply disruptions and the political climate around the gold mines.Therefore, an investor has to study the fundamentals of the company in a similar way to investing in stocks in other industries. Depending on the profile and country of the mining company, the risk undertaken by the investor can vary considerably.