Coins and small bars tend to trade at a premium.
Setting the standard
When looking at larger bars, the London Bullion Markets Association Good Delivery sets the standard for weight and purity of most of the traded physical gold.
The LBMA maintains and publishes “Good Delivery” lists that establish a set of criteria that a refiner and its bullion must satisfy before being accepted for trading.
According to the Good Delivery Rules of the LBMA, a gold bar must have a minimum fineness of 99.5 per cent and a weight of approximately 400 troy ounces or 12.5 kilograms. At today’s prices such a bar would cost around $600,000.
Futures markets also provide access to gold.
Gold futures are standardised, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, of a specific quantity of gold at a predetermined price on a future delivery date. NYMEX Gold futures prices are traded in lot sizes of 100 troy ounces.
Through the system of margin, futures market positions offer leverage to the investor. But to access the futures market, the investor must be a member of the exchange or have a relationship with a broker who is a member.
Gold exchange-traded products provide investors with exposure to the price performance of spot gold bullion.
The most popular gold ETPs are physical gold products that are backed by gold bullion held in secure vaults.
Investors have favoured gold ETPs as they offer a cost-efficient and a secure way to participate in the gold bullion market without having to take physical delivery of the gold itself.
These products offer many of the advantages of holding physical bullion directly without the investor having the hassle of vaulting and insuring (these are incorporated into the management cost of the product).
These products do not have the same price premium as coins and small bars, but investors that buy these securities gain metal entitlement to LBMA bars held by the issuer (and so investors do not have to buy a 400oz bar themselves to access the advantages of investing in bullion).
It is important that investors understand the differences between individual gold ETPs to ensure the product they are considering investing in will intrinsically meet their investment goals.
We believe that the robustness of the structures and processes that govern physically backed gold ETPs are key to selecting a vehicle that holds physical gold.
It is beyond the scope of this article to list all the considerations, but we believe that robust security of the gold, pricing transparency, trading liquidity and spreads are key aspects to consider.
After all, gold is a port of call in times of market anxiety, and so a gold ETP should remain structurally robust in times of financial market stress.
