DUBAI — A recent analysis by Invesco shows that investors that have opted to gain exposure to gold through futures may have paid significantly more in terms of costs in 2020 versus those that have used Exchange Traded Commodity (ETCs) products.

The February ’21 gold future, which will soon be the next active contract, has been trading at about $10 per ounce premium (51bps) versus spot gold. According to Invesco’s analysis, while not as expensive as previous rolls this year, this still equates to a substantial cost to investors as the expiring contract (December ‘20) is trading very close to spot prices.

Jim Goldie, EMEA head of Capital Markets, ETFs and Indexed Strategies at Invesco, said: “This suggests that investors accessing gold exposure versus futures in 2020 may have endured aggregated roll costs of 600bps or more, since the coronavirus pandemic disrupted gold futures markets. This compares with obtaining exposure to physical gold via ETCs, which can be as low as 15bps holding cost per year.”

Invesco highlights that investors using futures may continue to overpay for gold exposure at a time when Gold ETCs are offering very low-cost access.

Looking specifically at the December ‘20 contract, which is currently the active contract that is nearing expiry, the analysis shows that clients rolling August ’20 to December ’20 contracts may have paid a premium of approximately $27.50/oz (146bps) versus spot gold.

The December contract has recently been trading at under $2/oz premium versus spot and as a result the client has worn the full cost of trading the previous roll at a large premium, which is consistent with what Invesco has witnessed for the majority of rolls this year.

Goldie says: “While gold futures contracts are typically rolled in the week prior to the month of expiry, switching gold futures to ETCs can be done at any point in time.

“The cost to switch gold futures to gold ETCs is generally a reflection of the Exchange For Physical (EFP), which is currently very cost effective from the expiring December ’20 contract, which is trading in line with spot gold. Under present market conditions, switching to ETCs is an attractive option compared to the recent costs of rolling gold futures.”

Many investors historically have used futures as costs have been cheaper. However, fundamental long-term changes have taken place within both the futures and ETF markets, which have impacted costs for both products.

ETF markets have become more competitive resulting in providers lowering management fees and forcing costs down, while futures pricing has been impacted by higher capital costs and lower risk appetite by banks, driven primarily by regulatory changes since the financial crisis.

The recent pandemic has caused a series of unprecedented events for the gold market including logistical issues affecting EFP (exchange-for-physical) mechanisms, record gold stockpiling in the COMEX warehouse and rising gold price based on shortage fears.

The resulting market dislocation has led to investors facing uncertainty around futures holding costs. ETF costs tend to be more predictable over time and are fairly consistent, which might make more sense for long-term investors.

Alessio Cirillo, client director at Invesco EMEA, said: “For Middle East investors who do not want to hold gold in physical form, gold futures could be an option. However, given today’s market, the higher costs of margin and rolling from one futures contract to the next need to be considered.

“Gold ETPs offer a low cost, simple and efficient way to gain exposure to the gold price without the additional costs and complexities involved with other types of gold investments.” — SG