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Tatra banka

22.2.2017 11:47

Investment tools

With its diverse forms gold offers attractive investment tools according to
the investor's preferences.

Certificates and options

Since a great variety of certificates is traded on stock markets, we will only mention
a few:

Index certificates: They try to follow the underlying gold price expressed usually in USD 1:1; there is
no advantage to ETF; the issuer's risk is a disadvantage; they do not usually have a fixed maturity; they do not use leverage effect.
In addition to index certificates there is a great variety of tools that similarly as index certificate have the disadvantage of the issuer's risk
(therefore the issuer should be carefully considered), but compared to ETFs offer attractive particulars:

  • Quanto certificates. Their task is to secure the investment development with regard to the fluctuation of EUR/USD which brings great advantage, since gold usually shows strong performance mainly when dollar is weak.

  • Leverage certificates. Compared to options their advantage lies in the absence of the option time value, which makes them available for investment without fixed maturity; the disadvantage is the barrier - after reaching the barrier the investor loses majority of their investment as well as allowing for significant loan costs which are included in this security price by the issuer.

Options: The advantage is no barrier and the investor can "wait out" stronger fluctuation of prices until the option maturity and hope for the prices to recover; the disadvantage is the loss of the option time value, which for less experienced investors complicates the transparency. The last two alternatives are suitable mostly for speculators and investors focusing on short-term investments who expect significant price fluctuations. Investing requires good knowledge of option theory.


Equally suitable for speculators or professional investors who want to participate in movements of the underlying asset by way of a lever.

Physical purchase of gold (coins, bars, etc.)

  • Advantages: Physically available, not dependant on the financial market operation, practically indestructible.

  • Disadvantages: Comparatively high difference between the purchase and selling price, particularly with lower nominal values; costs related to storage and insurance against theft, particularly with higher volumes.

  • Summary: Relatively expensive form of investment, relies on growing prices of gold; it is recommended as the iron ration for the investment portion that serves as a security for worst case scenario, e.g. for an armed conflict.

ETF - securities covered by gold

Gold is traded in the form of securities on several stock exchanges. These forms of regulated registered securities are called Exchange Trade Commodities (ETCs) or Exchange Trade Funds (ETFs). They should imitate the gold price development as accurately as possible. Unlike derivatives, these securities are usually fully covered by gold. Technically, the actual gold is purchased at the time of the client's investment in the form of bars stored in the bank's vaults. These types of securities brought on major portion of demand for gold and have formed approximately 38% of provable new demand for gold since 2007 and roughly 7.5% of total demand. In 2008, ETFs held over 1,500 tons of gold, which is more than the reserves of the Swiss national bank.

  • Advantages: Cheap and easy solution; compared to the purchase of physical gold the difference between the purchase and selling price is much lower; trading on the stock exchange; records of securities are identical with other securities, such as shares; no threat of theft, risk related to the issuer's creditworthiness reduced.

  • Disadvantages: The fund charges an annual fee for storage, insurance and acquisition charges. Due to this fact the ETFs development is lagging in the long run behind the physical gold development (the investor must consider the potential efficiency of physical gold, while the economies of scare connected to ETF are probably higher).

  • Summary: Cheap and practical solution for everyone who wants to invest without using the leverage effect and without the gold issuer's risk; it is no coincidence that this is the fastest growing form of investment in gold.

Shares of companies operating in gold extraction

It is clear that an investment in shares of companies operating in gold extraction is not a genuine investment in commodity, as numerous risks are associated, but also opportunities offered by stock market. In the event of market correction, sectoral shares are usually not able to depart from the general development. Moreover, the investor has no control over the possible mistakes of the company's management that could influence the company's profitability and reputation, and consequently the securities' rating. In addition, we cannot overlook a political risk, as gold is mostly extracted in less-stable countries. As such, the investments in these companies represent more investments in shares than commodity investments.

Based on: Raiffeisen RESEARCH