Getting Started in Metals: As Public Interest in Metals Has Grown, So Has the Number of Vehicles to Access Them. Here Are the Advantages and Disadvantages of the Most Popular Instruments

By McFarlin, Michael | Futures (Cedar Falls, IA), May 2012 | Go to article overview

Getting Started in Metals: As Public Interest in Metals Has Grown, So Has the Number of Vehicles to Access Them. Here Are the Advantages and Disadvantages of the Most Popular Instruments


McFarlin, Michael, Futures (Cedar Falls, IA)


Although gold has been a tradable asset since only 1971, following President Richard Nixon's taking the Unites States off the gold standard, it and other metals now are a large portion of many traders' portfolios. A look at average daily volumes in gold futures contracts traded at CME Group over the last 10 years shows that growth in interest (see "Gaining popularity," page 44).

Now, 40 years after becoming a tradable asset, gold and other metals can be accessed in a number of ways, including traditional physical holdings, futures contracts, exchange-traded funds (ETFs) and through correlated markets such as mining stocks. Each vehicle has its own advantages and disadvantages, but with so many options available, investors of all types should be able to find a product to match their temperament.

Physical holdings Futures & options Exchange-traded funds

Before discussing each of the specific investment vehicles, David Meger, director of metals trading at Vision Financial Markets, reminds that, "No one vehicle is necessarily better than the others. It's all about what the comfort level of the client is, what the client is acclimated to trading and just what it is they are looking for. We can draw out the plusses and minuses of each, but at the end of the day, they're each relatively similar."

Physical holdings

The most straightforward way of accessing metals is to buy and physically hold the actual metal in bars or coins. Stephen Platt, senior account executive at Archer Financial Services, says one of the main draws of physical holdings is security. "You actually have the metal and a lot of people feel more secure holding the actual gold," he says.

Bill Downey, analyst at GoldTrends.net, explains that people holding gold for security reasons generally hold it for its ability to retain long-term purchasing power and as insurance in case of an unforeseen event.

In addition to security and purchasing power, Platt says some people purchase physical gold as a way of transferring wealth in terms of giving it as a gift.

On the down side, Downey says people with physical holdings have to worry about liquidity. "If you are going to be trying to move product on a sharp downtrend, you're not going to get good prices for it," he says.

Trying to liquidate physical holdings quickly can be more difficult if you remove the metal from an approved warehouse because it may need to be reassessed before you can sell it. Storing metal in a warehouse necessitates a nominal storage fee, though. And possession is nine tenths of the law, as former MF Global customers learned when a bankruptcy trustee laid claim to their physical holdings in warehouses.

Ultimately, Downey says that generally physical holdings should be considered a longer-term investment because the lack of liquidity, storage fees and higher commissions can make them more difficult to trade on a shorter time horizon.

Futures

Futures contracts on metals offer the benefits of leverage and a lot of the same advantages of physical holdings because if a buyer holds the contract until expiration, he takes delivery of the metal. However, he then has to pay the full cost for 100 oz. of gold instead of margin, which usually is between 5% and 10%.

Meger says the futures markets have a number of advantages going for them. "No. 1 is liquidity and the ease of entering and exiting the market. With the futures market, you're talking about a nearly 24-hour trading platform with great liquidity. Add on top of that the ability to use leverage," he says.

Additionally, the futures markets tend to be better regulated than the physical marketplace. "It's a regulated industry vs. an unregulated industry," Platt says. "When dealing in the futures industry, there is a lot of regulation between the [Commodity Futures Trading Commission] and the [National Futures Association]. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Getting Started in Metals: As Public Interest in Metals Has Grown, So Has the Number of Vehicles to Access Them. Here Are the Advantages and Disadvantages of the Most Popular Instruments
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.