Gold & Commodities · Intermediate · 4 min

Physical, ETC, futures, mining stocks: compared

You can compare the four main ways to invest in a commodity and explain why each one can behave differently from the commodity's spot price.

Four doors

You think gold or oil will rise and want to take part. Which product do you buy? A bar in a safe, a gold note on the exchange, a futures contract, or shares of a mining company?

All four are called gold investments. But they do not behave the same, and in some years the differences are larger than the move in gold itself. This lesson compares the four main routes.

Same metal, different risks

Comparison Three ways to hold a commodity: physical bars and coins with storage costs and wide spreads, exchange-traded commodities with issuer risk, and futures contracts with leverage that must be rolled. Physical Bars + coins Storage cost Wide spreads ETC Listed note Issuer risk Often backed Futures Contracts Leverage Must roll

Physical metal. Bars and coins give direct ownership. In return come dealer spreads between buying and selling prices, costs for safe storage and insurance, and the effort of selling. This route is practical mainly for precious metals.

ETCs. As you saw in the rubric on ETFs, exchange-traded commodities are debt securities. Many precious metal ETCs are backed by physical metal in a vault, others by futures or swaps. They trade like shares, at low cost, but the issuer and the collateral matter.

Futures. A futures contract is a standardized agreement to buy or sell a set amount of a commodity at a set price on a future date. Futures give direct and leveraged exposure, because only a margin is posted. They also expire. To hold exposure over time, traders and funds roll from an expiring contract into a later one, which can cost or earn money, as the next two lessons explain. Many oil and broad commodity products work this way.

Mining and producer shares. A mining stock is a share in a company that produces the commodity. Its price follows the commodity, but also the company's costs, debt, management, country risks and the stock market. Because costs are largely fixed, profits often move more than the commodity price. That is called operating leverage.

The CFTC warned investors in 2020 that commodity products organized as ETPs may not behave like traditional ETFs, and may not give investors the long-term price gains of the underlying commodity.

Gold +10%, miner +25%

A fictional miner produces gold at a cost of 1,500 per ounce. Gold trades at 2,000.

If gold had fallen 10% instead, profit per ounce would drop to 300, a decline of 40%, and the share would likely fall much more than gold.

Common mistakes

The takeaway

Bars, ETCs, futures and mining shares all give commodity exposure, but each adds its own costs and risks: storage, issuer, roll or company.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

  1. 1Tap the route that has to be rolled before each contract expires.

    Tap the chart.

    Comparison Chart for the question: Tap the route that has to be rolled before each contract expires. Physical Bars + coins Storage cost Wide spreads ETC Listed note Issuer risk Often backed Futures Contracts Leverage Must roll

    Futures expire. To keep exposure, positions are rolled into later contracts, which can cost or earn money, as the next lessons show.

  2. 2Gold rises 10%. A gold mining share rises 25%. Why can that happen?

    Miners have operating leverage: a higher gold price falls mostly to profit. It works in reverse when gold falls.

  3. 3What did the CFTC warn about commodity ETPs in 2020?

    Futures-based products have roll costs and other effects that can make them drift from the spot price.

  4. 4What is a futures contract?

    Futures are standardized exchange contracts. Most traders close or roll them before delivery.

of 4 correct.

Sources