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Understanding The Difference Between Gold Futures & Gold ETFs

by | Jun 4, 2021 | Business

Gold has always been a haven asset and has always been a top performer at times of increased volatility due to uncertainties. Over the years, a variety of ways have been made available to active traders to invest in gold. Two of the most popular ways of investing in gold in recent times are Gold Futures and gold ETFs. 

Gold ETF 

Gold ETFs are gold asset-backed instruments that vary based on the prices of gold. By buying a Gold ETF, investors can put money in a gold asset without actually buying Gold. Buying a Gold ETF on an Online trading platform in Singapore is similar to buying a share or a commodity fund through a brokerage or a fund manager.

Gold Futures 

Gold Futures are contracts that are traded on exchanges wherein the buyer agrees to buy a specific quantity of gold at a predetermined price at a certain future date. So, if an investor has a view on the price of gold in the future, the investor can hedge his position by buying appropriate gold futures at an Online trading platform in Singapore.

Some of the significant differences in both these instruments are:

Differences in Market Liquidity 

The total volume of gold traded in Gold ETF is fairly small when compared to the total number of Gold Future contracts. Online trading platforms in Singapore indicate that the COMEX Gold Futures have a market size of 20 million ounces per day while Gold ETF trades 2.4 million ounces per day. This implies that there is a lot of hedging and speculation in Gold Future Contracts compared to Gold ETFs. However, sometimes liquidity could be a concern for ETFs for sufficiently large volume trade.

Opportunities for Leverage 

The striking difference between ETF and the Futures market is the opportunity for leverage. While Gold ETFs cannot be purchased on leverage, except the broker provided leverage, the Gold Futures are leveraged contractual instruments where investors pay only for the right to buy or sell Gold of a specified quantity on a specified date. This huge leverage on the Gold Futures can magnify both profits or losses. So, in a Gold ETF, investors can earn or lose amounts equal to amounts in which gold prices move. However, because Gold Futures are leveraged instruments, investors can earn or lose as much as 25 times the profit/loss of an ETF. Hence, one has to be extremely careful while using Gold Futures. 

Minimizing Tracking Error 

An investor investing in Gold ETFs is exposed to costs like ETF creation/redemption fees, fees, brokerages and other asset management costs like administrative expenses, marketing fees, general expenses, transactional costs and so on. All these costs add to a tracking error in the price of Gold ETFs. On the other hand, investors in Gold Futures, investors do not incur these costs and avoid any administrative or tracking errors.

Further Tax Implications Summary

Since Gold ETFs are similar to shares, buying Gold ETFs have similar tax implications as buying shares. Investors in Gold ETFs are subject to Short and Long term capital gain taxes. Typically, investing in gold futures may probably help save taxes. However, the exact tax implication to an investor depends on the type of investor, location and other specific cases and you need to consult an attorney in this regard. 

Thus, while both Gold ETFs and Gold Futures help you take exposure to Gold if one is merely looking to invest for a long time, despite their drawbacks, Gold ETFs are good instruments while if one wants to benefit from the rise or fall in the price of gold in the future, Gold Futures are a logical choice.