Structured products
The market for structured products is dominated by institutional investors - or, in the case of forwards, by gold market professionals - because the minimum investment can be high. The following is a general overview of what these products are like and how they work.
Forwards
Like futures, forward contracts are agreements to exchange an underlying asset - in this case, gold - at an agreed price at some future date. They can therefore be used either to manage risk or for speculative purposes. But there are important differences between forwards and options traded in the over-the-counter (OTC) gold market on the one hand, and futures and options traded on one of the exchanges on the other:
- a forward contract (or OTC option) is negotiated directly between counterparties and is therefore tailor-made, whereas futures contracts are standardised agreements that are traded on an exchange
- although forward contracts offer a greater flexibility and are private agreements, there is a degree of counterparty risk, whereas futures contracts are guaranteed by the exchange on which they are traded
- because futures contracts can be sold to third parties at any point before maturity, they are more liquid than forward contracts (whose obligations cannot be transferred).
Gold-linked bonds and structured notes
Gold-linked bonds are available from the world's largest bullion dealers and investment banks. Their products provide investors with some combination of:
- exposure to gold price fluctuations
- a yield
- principal protection.
Structured notes tend to allocate part of the sum invested to purchasing put/call options (depending on whether the product is designed for gold bulls or bears). The balance is invested in traditional fixed income products, such as the money market, to generate a yield. They can be structured to provide capital protection and a varying degree of participation in any price appreciations depending on market conditions and investor preferences.
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