Derivatives Of Gold

A gold derivative is also a derivative that derives its value from the price of gold. Unlike gold stocks, gold derivatives like gold ETFs, gold options, gold futures and gold securities do not give their holder any right to actual physical gold. Gold derivatives are traded on futures exchanges like the New York Board of Trade and the London Commodities Market.

 

Futures contracts are used to hedge against fluctuating prices of underlying instruments. This is often done in order to lock in the price of gold at a certain price in the future. In order for gold derivatives to be meaningful, they have to be traded on futures exchanges and not on stock exchanges. By selling future contracts, investors are able to lock in the prices of gold and are thus ensuring themselves of a steady return to their gold investments.

Gold Options

The most popular gold derivatives are gold forwards and options. This form of gold derivatives is used when an investor wants to purchase a specific quantity of gold at a definite price in the future. In this case, by buying gold forwards or options, the investor will be able to buy up the amount of gold that they need in the future. This guarantees them a profit in the process.

Gold Futures

Another type of gold derivatives is gold futures. This form of gold derivative is most often used when an investor is holding a gold contract that expires in less than one year. In this case, the gold buyer will be able to sell the gold contract during its term and take a significant financial loss. The major risk of gold futures is that the prices may go down significantly from the time of the contract. This would mean a significant loss for the gold buyer.

 

A third form of gold derivatives is buying gold options. This form of gold derivatives is used mostly when an investor does not want to risk buying physical gold but wants to make a financial investment in the form of gold or commodity coins. In this case, the investor will be able to make money by selling options during the period of the contract. This way, he or she will be able to benefit if the price of gold goes up. However, the risks of this form of gold derivatives are also large as there is no way of telling whether the price of gold will go up or down.

Gold Contracts

Another form of gold derivatives is the gold futures contract. In this kind of gold contract, the buyer will be able to sell gold only if the price of gold goes up. This way, he or she will profit from the increase in the demand for gold, even if the price goes down. This option is more secure than the other forms of gold derivatives and the investor is guaranteed to make money when the price goes up.

Physical Gold

A fourth form of gold derivatives is the gold derivative that is based on the price of the physical gold itself. This option is most popular with investors who cannot get the time to monitor the market closely and buy or sell gold themselves. This type of gold derivatives allows the holder of the contract to sell his or her physical gold on a particular date for an agreed price, regardless of the market conditions.

 

The London spot market is one of the most common venues for gold derivatives. It allows the holder of the option to sell his or her gold contracts at a certain price determined by him or her at the time the contract is made. For example, an investor may sell the option to buy a quantity of put options, which allow him to hedge the risk on gold prices. This way, he will be able to make money even if the spot price goes up, as he or she will be able to sell put options to buy call options at a profit.