Gold ETFs and Gold Futures: What’s the difference?

They say that all that glitters is gold, so when market volatility shakes investor confidence, it is not surprising why gold is the investment product of choice. During some of the biggest market crashes, the price of gold usually rises, making it a kind of safe haven. That’s because precious metals are inversely proportional to the stock market.

Another reason why gold is so popular is that the physical supply of gold exceeds world reserves compared to demand. According to the World Gold Council, it takes a long time for gold prospectors to put new mines into production and find new gold deposits.

But what if you don’t want (or can’t afford) to invest in the physical commodity itself? In terms of convenience and cost, investors have a variety of options. These include gold exchange-traded funds (ETF) and gold futures.

Read on to learn more about the differences between gold ETFs and gold futures.

Key points

  • Gold ETFs provide investors with a low-cost, diversified choice to invest in gold-backed assets rather than physical commodities.
  • Gold futures are contracts traded by buyers and sellers on exchanges. The buyer agrees to purchase a certain amount of metal at a predetermined price on a date set in the future.
  • Gold ETFs may have management fees and significant tax implications for long-term investors.
  • There are no management fees for gold futures, and taxes are divided into short-term and long-term capital gains.

Gold ETFs and Gold Futures: An Overview

Gold ETFs are commodity funds that trade like stocks and have become a very popular form of investment. Although they consist of assets backed by gold, investors do not actually own physical commodities. Instead, they have a small amount of gold-related assets, which makes their investment portfolio more diversified. Generally speaking, these tools allow investors to gain exposure to gold through smaller investment positions than physical investments and futures contracts. However, many investors do not realize that the trading price of an ETF that tracks gold may exceed its convenience.

On the other hand, gold futures are contracts traded on exchanges. Both parties agree that the buyer will purchase the product at a predetermined price on a certain date in the future. Investors can invest funds into commodities without paying in full in advance, so there is a certain degree of flexibility in the time and method of transaction execution.

Gold ETF

The first exchange-traded fund (ETF) dedicated to tracking the price of gold was launched in the United States in 2004. The SPDR Gold Trust ETF is touted as a cheap alternative to owning physical gold or buying gold futures. However, the first gold ETF was launched in Australia in 2003. Since its launch, ETFs have become a widely accepted alternative.

ETF stocks can be purchased through a brokerage company or fund manager just like any other stock.

By investing in gold ETFs, investors can invest funds in the gold market without having to invest in physical commodities. For investors with limited funds, gold ETFs provide a flexible way to gain exposure to asset classes and effectively increase the diversification of their investment portfolios. In other words, ETFs expose investors to risks related to liquidity. For example, the prospectus of SPDR Gold Trust stipulates that the trust can be liquidated when the balance in the trust is below a certain level, the net asset value (NAV) is below a certain level, or shareholders holding at least 66.6% of the equity agree. Of all outstanding shares. These actions can be taken regardless of whether the price of gold is strong or weak.

Since investors cannot claim any gold shares, according to IRS regulations, the ownership of ETFs represents the ownership of collectibles. That’s because gold ETF managers will not invest in gold because of its coin value, nor will it look for collectible coins.

This makes long-term investments in gold ETFs (one year or more) subject to relatively high capital gains taxes. The maximum tax rate for long-term investment in commodities is 28%, rather than the 20% that applies to most other long-term capital gains. Exiting positions a year ago to avoid taxes will not only weaken investors’ ability to profit from gold’s multi-year earnings, but will also make them pay higher short-term capital gains taxes.

The last thing to consider is the fees associated with ETFs. Since gold itself does not generate revenue, and there are still expenses that must be paid, the management of the ETF is allowed to sell gold to pay for these expenses. Each sale of gold by the trust is a taxable event to shareholders. This means that fund management fees and any sponsorship or marketing expenses must be paid through liquidation of assets. This reduces the overall underlying assets per share, and in turn, the value of an investor’s representative stock may be less than one-tenth of an ounce of gold over time. This may result in a difference between the actual value of the underlying gold asset and the listed value of the ETF.

Despite the differences, both gold ETFs and gold futures provide investors with the option to diversify their positions in the metal asset class.

Gold futures

As mentioned above, gold futures are contracts traded on exchanges, and the buyer agrees to purchase a specific quantity of commodities at a predetermined price on a certain date in the future.

Many hedgers use futures contracts as a way to manage and minimize the price risk associated with commodities. Speculators can also use futures contracts to participate in the market without any physical support.

Investors can hold long or short positions in futures contracts. In a long position, investors buy gold in anticipation of a price increase. Investors are obliged to receive metals. In a short position, the investor sells the commodity but intends to cover it at a lower price later.

Because they are traded on exchanges, futures contracts provide investors with more financial leverage, flexibility, and financial integrity than trading actual physical commodities.

Compared with the corresponding ETF, gold futures are simple and straightforward. Investors can decide to buy or sell gold by themselves. There are no management fees; taxes are divided into short-term and long-term capital gains; no third party makes decisions on behalf of investors; investors can hold the underlying gold at any time. Finally, because of the margin, every 1 dollar in gold futures can represent 20 dollars or more of physical gold.

Examples of Gold ETFs and Gold Futures

For example, a US$1,000 investment in an ETF such as SPDR Gold Shares (GLD) will represent one ounce of gold (assuming that the gold trades at US$1,000). Using the same $1,000, investors can buy E-micro gold futures gold contracts that represent 10 ounces of gold.

The disadvantage of this leverage is that investors can make a profit or lose money based on 10 ounces of gold. Combining the leverage of a futures contract with its regular expiration is obvious why many investors switch to ETFs without a real understanding of the rules.


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