Should You Trade A Gold ETF Or A Derivative?
Gold ETF
Gold ETF investments offer an easy opportunity to invest in the most reliable store of value in history, without the attendant problems of having to actually store the metal. Gold is one of the most stable commodities to trade, for a variety of reasons. Firstly, gold is stable compared to other investments. Because there are large numbers of people who buy gold and hold it through all conditions, the price is never going to fluctuate as wildly as many others. Secondly, gold is one of the most predictable of commodities, moving in the opposite direction to the equity markets on nearly all occasions.
Gold also has the great quality of not being affected by extreme circumstances in the way that some other commodities would be. There are no extreme price movements due to a bad harvest destroying a crop, for example. So, gold is good for both beginners and experts to trade. At this present time, it is proving more predictable and stable than ever before. As the world economy sinks ever further into depression, the gold price is reaching record highs. This trend looks set to continue for a long time to come.
There is, of course, one fundamental disadvantage of using an instrument such as ETF Gold funds to trade the price of the metal, and that is that you are locked in to buying from a perfect market. Whatever the price is on the index, that is what you have to pay. You have no opportunity to negotiate a better deal for yourself as you would have if you were actually buying the metal. If you are planning to invest in gold for the long term, you may well find it worthwhile to set up a buying operation.
Another feature of trading gold ETF funds in this way is that you are locked into the gains or losses that the index gives you, and you have no potential for gearing other than the possibility of using your own borrowed funds. There are other derivatives of the gold price which give you a far greater potential for gain, although they also have an equal potential for devastating loss if you read the market wrongly. Futures have the most spectacular potential, but you can lose far more than the value of your initial investment.
The most stable alternative to gold ETF trading is the options market, because although options offer the potential for gearing the losses you can incur are strictly limited to the value of the option. An option is simply the right to buy or sell a commodity at a certain price in the future, and it carries no obligation to do so. If the price moves in the opposite direction, you simply let the option expire worthless. Because of this potential for total loss, you will need to use a smaller percentage of your investment bank than with a gold ETF.
