The surge in the spot price of gold and other precious metals and commodities have opened the eyes of retail investors around the world to the potential gains possible through holding commodities. Many investors choose synthetic gold ETFs to pool their investments and receive a ‘leaner’ and more efficient exposure to gold prices. Synthetic gold ETFs invest in derivatives such as gold futures contracts and swaps, rather than actual gold bars. Holding certificates means that the fund provider does not need to pay for costly delivery and storage costs associated with hoarding millions of dollars of gold.
Synthetic gold ETFs ‘cheapness’ do come with new costs of their own, namely counterparty risk. This is the risk that the party with which these derivatives will be settled with, may become insolvent and unable to pay the returns demanded by the swaps and futures contracts. To mitigate this risk, all ETF providers ensure that the counterparty has allocated collateral/security against the value of the potential payout (with some providers demanding the counterparty puts up 150% collateral for increased security) however recently concerns have emerged that these counterparties – normally banks, are only providing their illiquid and hard-to-value assets as collateral. Learning what we have about the falling values of illiquid assets during falling markets from the financial crisis, this has turned heads at the major financial regulators in Europe especially, who are currently expressing their concern against these arrangements. Expect future developments in the regulatory arena!
Here is a non-exhaustive list of synthetic gold ETFs, along with their ticker symbol to aid your further research. Some of these may attempt to track the gold spot price, whereas other may track a gold index. We do not necessarily recommend these investments, please read our disclaimer.
List of Synthetic Gold ETFs
DB Gold – (Ticker DGL)
ETRACS CMCI Gold Total Return – (Ticker UBG)
PowerShares DB Gold Double Long ETN – (Ticker DGP) – Leveraged
PowerShares DB Gold Short ETN – (Ticker DGZ) – Will move in opposite direction to underlying index
PowerShares DB Gold Double Short ETN – (Ticker DZZ) – Leveraged opposite movement.
Synthetic Gold Exchange Traded Funds are just one tool in a commodity investors arsenal. They are generally less popular than the list of physical gold ETFs. For more strategies for investing in commodities, read Financial Expert’s ‘How to Invest in Commodities Guide‘, which outlines all the major methods investors use to profit or hedge with commodities.
If you can recommend an addition to this list, contact me.