Gold Buying Motives & Options
Gold Buying Motives
Firstly, it is worth reviewing your motive for gaining exposure to gold – to hedge, to invest or to speculate. This can be done by identifying your primary goal, time horizon and attitude to risk, using the table below:
| Motive: | Hedge | Invest | Speculate |
|---|---|---|---|
| Goal | reduce risk with an offsetting position | grow wealth with assets based on fundamental value | fast profits from price swings |
| Horizon | short to long term | long term (years to decades) | short term (hours to months) |
| Risk | risk averse | moderate risk | risk seeking |
Gold Buying Options
Secondly, it is worth understanding which option for gaining exposure to gold best matches your motive. The 3 main options are physical gold, paper gold and gold mining shares.
Physical gold refers to gold that has been delivered to you or your storage operator. Gold bullion refers to physical gold manufactured in the form of coins, rounds or bars (with a high standardised purity).
Paper gold refers to a written agreement to receive the market value of gold in the future. Paper gold includes gold certificates issued by banks & mints, shares in exchange traded commodities (ETC’s) and options & futures contracts. With paper gold you don’t actually own gold, you own a written agreement with a third party. The third party selling paper gold owes you gold or the market value of gold. Paper gold agreements may contain clauses allowing settlement in cash instead of the market value of gold under certain conditions.
Gold mining shares are equities representing ownership in a company that explores for, extracts and refines gold.
These 3 options for gaining exposure to gold are mapped to the 3 different motives in the table below:
| Motive: | Hedge | Invest | Speculate |
|---|---|---|---|
| Physical Gold | Yes | Yes | No |
| Paper Gold | No | Yes | Yes |
| Gold Mining Shares | No | Yes | Yes |
As seen from the table above:
Physical gold can be used to hedge and to invest (if gold is undervalued).
Paper gold / gold mining shares can also be used to invest (& speculate), but not to hedge.