By John Wasiliev
One investment being increasing used by investors and short term traders is the ASX listed gold ETF (codename ), a fund that offers exposure to the physical gold price.
The fund allows investors to buys gold backed tradeable securities that are equal to around 1/10th of an ounce of gold converted to Australian dollars.
Because the securities can be bought and sold daily on the ASX, it is used as a convenient way to invest in gold by the clients of financial planner Dixon Advisory.
According to managing director Alan Dixon, gold is recommended as a diversification investment. Like other commentators, Dixon sees gold as being like owning an extra currency.
The Dixon approach recommends medium to long term investors have up to five per cent of their money in gold which he believes will be a great counter balance for investment portfolios if there is another financial markets reversal.
Because the gold ETF pays no income, Dixon says it is an investment that should be monitored for profit-taking opportunities.
During 2007-08 when the ETF price surged to $150, Dixon did recommend some profit-taking. At the start of November, the price range for the GOLD ETF was $112 to $117 per security.
Because the ETF is created with gold backing, there is no credit or counterparty risk in trading the fund.
However the constant fluctuations of the Australian dollar against the American dollar can mean the trading properties can be quite different to the movement of gold traded in American dollars. See the graph below.
For short term traders looking for leveraged investments, most over-the-counter contracts for difference brokers offer CFDs over the GOLD ETF on initial margins that range from 10-to-15 per cent. Such trades are virtually identical to trading shares.
Commsec head of derivatives Peter Tardent provided the following over the counter CFDs trading example with the GOLD ETF as the underlying investment. All prices are quoted in Australian dollars.
Buy 100 units of GOLD (GOLD is 1/10 ounce approx) at $111.81 per unit
Sell 100 at $112.00
Brokerage = $14.95 brokerage buy/sell = $29.90
Initial margin at 12.5 per cent is $1,398
assume average balance $11,300, Interest rate (based in Australian Cash Rate) is 6 per cent, Interest cost $124.45
$11,200 (sale price) - $11,181 (cost price) - $154.35 (interest and brokerage)
$135.35
This position would have been profitable if the trader had waited for the early November rally that took the Australian dollar gold price above $117.
While CFDs based on the GOLD ETF are traded in Australian dollars, it is also possible to trade over the counter gold CFDs in American dollars over $US physical gold and American gold futures.
According to Harley Salt, head of sales trading at CFD broker IG Markets, the late October gold price break above $US1000 sparked renewed interest in long gold positions.
He gave an example of a gold trade that was popular from late October to early November.
In late October after gold corrected, technical signals suggested a rally was possible.
On October 29, a trader who expected a rally could have bought gold at $US1040.3 to sell, $US1040.8 to buy from IG Markets.
The trader buys one standard 100 ounce contract which equates to $US100 per full point price movement.
This means that for every $US1 movement in the price of gold, traders could make or lose $US100.
IG Markets charges no commission on gold but there is a dealing spread of 50 cents.
For this position a 3 per cent deposit on gold at a price of $US1040.8 required an outlay of $US$3122.40 ($US100 x 1040.8 = US$104,080 x 3%).
For each day the position was open traders were debited interest to reflect interest funding.
The annual rate of interest on this position was 2.74 per cent which worked out to be approximately $US7.80 a day (US$100 x 1040.8 times 2.74% / 365).
A week later gold is trading higher and the quote is now 1095.2 to sell 1095.7 to buy.
A trader who sells at $US1095.2 would make a gross profit of $US5440.00 calculated as follows:
Opening Level: $US1040.8 Closing Level: $US1095.2 Difference: $US54.4
One contract x $US100 x 54.4 equals $US5440.00 gross profit.
Interest on this position for a week would be approximately $US54.60.
Net profit on the trade would therefore be $US5440.00 – $US54.60 = $US5385.40.
The possibility that the gold price could experience rallies that are then followed by a correction that can catch short term traders out has highlighted the attractions of using stop losses facilities offered by a number of promoters.
For example, after the gold price climbed above $US1120 it quickly experienced a correction back to the $US1100 level.
For a trader who bought a spot gold CFD offered by broker CMC Market as it climbed above $US1100 could have combined this with a stop loss that followed the price up and paid off when the price fell.
The following worked from CMC illustrates such a trade:
The Spot Gold price is $US1100.0/0.50
Buy 100 CFD contracts at $US1100.50 on 1 per cent margin outlaying $US1105 in margin requirements.
The CFD has a face value of $US110,500.
Accompany the trade with a stop loss.
CMC’s stop loss rules are that the order must be at least two times the spread (in this case US50c + 1 away from the bid/offer, or $US1.50).
While the tightest spread could be as close as $US1099, for a bit more flexibility $US1095 could be chosen.
This would limit the loss on the trade to $US5.50 per contract ($US1150.50 - $US1095 = $US5.50) At 100 times $US5.50 that is $US550.
As the price moves higher this stop can be moved so that it trails the rising price. CMC does not make any charge for such stop loss orders.
When the price rises above $US1120 say to $US1121. 0/21.50, the trailing stop might now have been increased to $US$1115.
If the price falls below this, the contract would be closed out at this level for a profit of $US14.50 per contract or $US1450 minus a financing charge.
According to CMC’s Eva Diaz stop losses do require an active approach to trading. Traders must always remember to actually place their orders.
As well as over the counter CFDs, there is also an ASX listed CFD over physical gold traded in American dollars.
When orders are placed for this CFD, funds are moved for margin purposes into $US and the trade is then placed in $US.
This type of trading with its exchange rate considerations changes the effect of the trade compared to trading the GOLD ETF.
In the following example provided by Commsec a trader buys a 10 ounce ASX listed gold CFD in August and sells in October.
Trader buys 10 units of GGX6 (ASX Gold CFD) at $US944.
Sells 10 units at $US1035
The initial margin required is $US495 ($A600.22). This is based on a foreign exchange rate on August 21 to convert Australian dollars to American dollars for initial margin purposes of $US0.8247
For the 67 days the position is held, long interest is charged at 1.5 per cent in $US
Total contract value $US9440
$US5.192
For the interest holding charge an average gold price of $US989.5 is assumed (using an average of $US995 to $US944). The interest cost for 21 days is $US27.25
$US5.69
Profit on trade is $US871.87 ($US10350 – $US9440 – $US38.13)
$US1366.87
$US amount converted back to Australian dollars at FX rate of $US0.9050
$1510.35
Minus margin $A600.22
$910.13
Related Article: Prospecting for gold