Comparison between Gold Contract Types

Gold contracts can be divided into “Spot gold” and “Gold future” contracts. Spot gold refers to the present price of trading gold at the present time whereas Gold futures refer to an  agreed price set today for settlement at a future time and date. Gold futures are usually conducted by qualified institutional investors due to the capital requirement, whereas individual investors usually prefer spot gold trading due to the lower capital requirement per contract.

Spot gold can be divided into the following: physical gold, paper gold, T+D gold trading and gold margin trading.

Physical gold: Physical gold trading requires physical delivery and storage. Investors purchase gold bars or bullion and profit whenever the value of gold appreciates. Using “buy and hold” strategy, investors may find themselves suffering a loss whenever the value of gold depreciates. Gold bullion can also be divided into more categories according to the purity, the quality of the bullion mint and the weight of the bullion. In most cases, investors will opt to invest in physical gold whenever value preservation is required.

Paper gold: Paper gold is the trading of a paper contract that appreciates in value according to the market price of gold. Paper gold is usually offered by the high street banks. In some cases, investors may require to deposit a certain amount to maintain the paper contract. While paper gold does not require the delivery or storage of physical gold, if the bank were to experience some turbulent financial hardship, the investors may not be able to retrieve the deposit amount immediately, hence a lack of liquidity with paper gold. Another point to note is that short selling is not offered with paper gold.

T+D gold: T+D gold is the gold contract adopted by Shanghai Gold Exchange (SGE). The most important point about this contract is that investors are unable to open a position at the current market price, as this contract requires a position be opened at a price and amount ahead of the current date and time. Very similar to gold futures, T+D gold requires a match making to occur whenever a position is offered to the exchange as a buy or sell position. Another point to note is that this product is restricted to only China based investors; therefore the trading volume is relatively low compared to other international exchanges.

London Gold Margin Trading (Loco London Gold): As the most common preference for gold bullion, Loco London gold offers investors the best of all other gold products, whilst providing a few other product incentives. Also known as LLG, Loco London Gold offers investors 24-hour access to the global bullion market. With trade volumes ranging in the trillions, LLG is becoming the number one choice for both institutional and individual investors. With the added feature of buying and selling (long and short positions), an investor does not require to own a contract of physical amount of gold to hold a sell position (shorting the market). As Hong Kong is the fourth largest gold exchange market in the world and is eligible to trade Loco London Gold through the Chinese Gold and Silver Exchange, more international investors are opting to invest in Loco London Gold.