Gold futures versus Gold ETFs

With the sheer amount of volume and elevated price levels in gold, it may be one of the best times to start trading in gold futures or gold ETFs. Except with there being so many options it’s hard to know which to choose. There are clear pros and cons in specific performance criteria to both futures and exchange traded funds including the following: physical ownership, leverage, and tracking error. Essentially, if you want to invest in gold like stocks it’s best to buy gold ETF shares, but if you want to trade gold, stick to trading gold futures.

Investability

If you desire to invest in gold for a specific time horizon beyond a couple of years your best bet will be to invest in gold ETF shares (symbol:GLD). Also consider this; if you wish to receive physical gold bars it is much easier to do so by investing in gold futures. Once you lock in a futures price and take physical delivery you are given a receipt of ownership of a serial gold bar, you will have rights of ownership to one gold bar (100 troy oz.) for each contract that you bought and your gold bars will be held in a safe gold depository.

 

• Leverage: Most new investors who are looking at gold as a potential money maker will opt to buy the exchange traded fund because it is not nearly as volatile as gold futures.
• Each dollar change in COMEX gold equals $100 change in one futures contract (100 oz.)
• That same change equals $4 change in a GLD portfolio (4 oz.)        

With that said it's easy to see why the gold ETF is easier to hold on to for the long haul. Nonetheless, if you choose to buy gold to obtain physical ownership or you want to reap mega returns on your portfolio from trading, gold futures are the way to go. 
                                                                                                                                     

Tracking error

This tracking error can be defined as the fund’s inability to match COMEX gold prices one for one all the time. Because of lack of liquidity and other intrinsic factors related to the market’s economics, tracking error should be considered as a reason to choose trading full futures contracts which are tied to COMEX gold. For the ETF the fund may trade at a discount to COMEX gold or at a premium depending on the near term sentiment of market participants. However, this tracking error should not be great and usually is very minimal due to the large amount of liquidity for gold shares.