Portfolio managers who are bullish on gold could turbo-boost an investment in the metal, with little added risk, by buying a small amount of highly geared gold share options.
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Financial instruments in the form of traded options to buy or sell shares or metals exist in the market, and can materially change the risk associated with any position taken. Holding gold metal is a common portfolio hedge, as the gold price tends to rise in periods of uncertainty, when other assets fall in value. Gold shares, of course, offer a similar, but more highly geared, alternative. That’s because gold mines have stores of unmined gold in the ground that become more profitable to mine as the gold price rises.
By buying the share and, particularly, an option on the share, you will have exposed significantly less actual capital and obtained the same hedging effect. If you had held 0.2% of the portfolio in GFI options, you got the same hedging effect as holding 10% of the portfolio in gold coins. If the gold price had done the opposite, and fallen 10%, you would have lost 1% of the portfolio capital if you had held gold coins , but only 0.
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