Gold-backed securities

Gold is traded in the form of securities on stock exchanges in Australia, France, Hong Kong, Japan, Mexico, Singapore, South Africa, Switzerland, Turkey, the United Kingdom and the United States. By design, these forms of securitised gold investment, all regulated financial products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds (ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the securities are 100% backed by physical gold held mainly in allocated form. These securities have had a major impact on the gold market, representing an annual average of 32% of identifiable investment and 6.5% of total physical demand over the 5 years to 2008. Financial advisors and other investment professionals can provide further details about these products.

Futures and options

Gold futures

Gold futures contracts are firm commitments to make or take delivery of a specified quantity and purity of gold on a prescribed date at an agreed price. The initial margin - or cash deposit paid to the broker - is only a fraction of the price of the gold underlying the contract. That means investors can achieve notional ownership of a value of gold considerably greater than their initial cash outlay. While this leverage can be the key to significant trading profits, it can also give rise to equally significant losses in the event of an adverse movement in the gold price. Futures prices are determined by the market's perception of what the carrying costs - including the interest cost of borrowing gold plus insurance and storage charges - ought to be at any one time. The futures price is usually higher than the spot price for gold. Futures contracts are traded on regulated commodity exchanges. The largest are the New York Mercantile Exchange Comex Division (recently rebranded CME Globex, after a merger between Chicago Mercantile Exchange and NYMEX), the Chicago Board of Trade (part of CME) and the Tokyo Commodity Exchange. Gold futures are also traded in India and Dubai.

The Commodity Futures Trading Commission provides extensive reports on derivatives trading in the United States. Tradable commodity indices are based on fully collateralised baskets of long-only commodity futures, all of which include a small allocation to gold.

Gold options

These give the holder the right, but not the obligation, to buy ('call' option) or sell ('put' option) a specified quantity of gold at a predetermined price by an agreed date. The cost of such an option depends on the current spot price of gold, the level of the pre-agreed price (the 'strike price'), interest rates, the anticipated volatility of the gold price and the period remaining until the agreed date. The higher the strike price, the less expensive a call option and the more expensive a put option. Like futures contracts, buying gold options can give the holder substantial leverage. Where the strike price is not achieved, there is no point in exercising the option and the holder's loss is limited to the premium initially paid for the option. Like shares, both futures and options can be traded through brokers.

Warrants

In the past, gold warrants were mostly related to the shares of gold mining companies. Nowadays commonly used by leading investment banks, they give the buyer the right to buy gold at a specific price on a specific day in the future. For this right, the buyer pays a premium. Like futures, warrants are generally leveraged to the price of the underlying asset (in this case, gold), but gearing can also be on a one-for-one basis.