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Gold

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1. What is it?

Gold is maybe the most relevant precious metal in the history of the mankind. Since the ancient times, the man works with gold not only to produce tresures and jewels, but several artifacts, as well as keep it stocked, to sustain value.

Gold is part of the commodities market, as it is mined from environment. Its market is considered risky, as prices tend to change dramatically as investors’ moods or market conditions change.

The gold as an investment is common during global crisis, as it retains its value and, sometimes, the investor can keep the physical asset. Usually, while the world is in crisis, investors tend to migrate to gold, making prices hike on these periods. When crude oil is high or the dollar is down, buying gold is also usual. In other words, the more uncertainties the market experience, the more is the demand for gold. Besides, it has a global liquidity, accepted anywhere, and keeping its value even after several wars, crisis and economical changes.

Main stock exchanges dealing with gold for cash delivery are London and Zurich, and New York for futures. Over there, the gold is quoted in troy ounces, which is equal to 31.1 grams. Here in Brazil it is possible to trade with gold at BM&FBovespa, in grams. As local prices are linked to international ones, dollar exchange rate changes influence on prices, which are based on New York prices.

The gold has been passing through a good age of profitability in the last few years, with an average annual increase of 12% since 1998. Hence the higher attractiveness for that, as a perfect balance between diversification and profitability. As previously mentioned, the gold hikes during global crisis, in which investor migrate and hedge their positions. However, investing in gold can also be risky, as prices use to change violently.

There are several ways to trading gold. The most common include the cash markets, future and forward markets. The cash market provides immediate delivery – either physical or financial – and works just like the stock market. For futures, prices are set up for future dates, with daily adjustments and guaranty margins. Forwards of gold determine a purchase or sale of gold in a pre fixed pricing (current prices + interests) for a period of time. Liquidation implies in the seller delivering the gold for the payment due to the buyer.


2. Cash delivery (Gold Spot)

Object is the fine gold, casted in ingots or bars by a refining company, and under the custody of an institution, both accredited by BM&F.

Currently, there are three types of gold lots for cash delivery. The 250g lot, the 10g lot and the 0.225g lot, all of them with a purity grade of 99.9%.

For an investor to deal with gold lots, he must mandatorily open an account in a broker, which will be supporting the operation. Gold can be traded either physically or financially. If the buyer opts for a physical delivery, he can withdraw multiples of 250g, although leaving the volumes under custody is also possible, for security. Besides, an insurance fee is charged for physical deliveries by the broker itself.

If you are willing to sell gold in the market, you must meet some requirements. First of all, choosing a broker to provide you a casting company authorized to operate and accredited by BM&F to produce the ingots with the right specs. Thereafter, the casting company sends the bars to a custodian, with the presentation and purity levels required. The custodian keeps the bars on your behalf. After that, the broker informs your intentions to trade the gold in the market, and transfers the bars to BM&F, which deposits in the account of the investor.

Remind that BM&F keeps a lot of gold bars. Thus, if an investor wants to deposit his bars and withdraw them after, the bars will be not necessarily the same. However, all bars have the same specs, sizes and value.


3.Characteristics

Terminology

Nowadays there are three types of contract for cash delivery:

  1. Standard lot of 250g – DIS OZ1
  2. Fractions of 10g – DIS OZ2
  3. Fractions of 0.225g – DIS OZ3

Code is comprised by DIS, standing for “available”, followed by OZ of “gold” and the number of the respective lot 1 standard (250 grams), 2 fraction (10 grams) and 3 fraction (0.225grams).

Contract

Gold cash contracts have the following characteristics:

Trading code

DIS OZ

Trading unit

Standard lot of 249.75 grams of contained fine gold, with 999 parts of gold for each
1,000 parts of metal.

Quotation

BRL per gram, with up to 3 decimal places

Minimal daily change

R$ 0,001 per gram

Standard Lot

250 grams

Max daily change

No limits

fraction

10 grams or 0,225 grams

Trading schedule

9am – 6pm

Liquidation

The next day after the last trading day, with physical delivery by the
seller and payments made by the buyer.

Operational Costs

The main costs involved on gold cash delivery deals are:

Brokerage: this can change depending on the broker, but usually reaches around 0.2% of the trading amount, although finding lower rates is always possible.

Custody fees: charged by the stock exchange and repassed by the custodian. The rate reaches 0.07% of the invested value per month, daily calculated over the investor’s position.

Insurance: if a physical delivery is being dealt, it is necessary to hire an insurance policy for transporting the gold bars – the broker uses to indicate a insurance company for such.

Stock Exchange fees: the stock exchange charges emoluments and a contribution to the guaranty fund. Costs may reach up to 6.32% of the reference tax, and must be paid one day after the last trading session.

Liquidation

Gold contracts can be executed in two different ways:

Physically: the physical liquidation involve real gold bars, and must be proceeded by the seller, with the delivery of 249.75 grams of fine gold ingots contained 250 or 1,000 grams with a purity level of at least 999.00 shares of fine gold per 1000 parts of metal or ingots of 100 or 400 ounces, with purity content of at least 995.00 shares of fine gold per 1000 parts of metal.

Financially: financial liquidation is due to the buyer by the first subsequential day from the expiration day, at previously agreed prices. The investor just keeps a note that indicate he is the owner of a certain volume of gold, although he never takes the bars properly. Financial liquidations provide more liquidity to buyers.

Day Trade

It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of gold futures. The settlement of day trades is performed automatically on the first business day following the date of closing of the business.


4. Gold Futures

Gold futures are nothing more than deals for selling or buying gold for a particular price, in a future date. Fixing prices for a deal in the future is also possible for gold, having in mind the prices that the market is willing to pay for. The contracts follow BM&F standards for futures. As usual, buyers and sellers must be updating the contract through the expiration dates, making or receiving payments as prices change.

Gold futures can be just financially executed, with no physical deliveries. Thus, as the contract expires, a correlation to BRL is made, according to the prices set up by sellers and buyers. Then, the difference is paid or received in cash, not in gold. Also, one can leave positions before expiration dates, by doing the opposite transaction – if he is ‘bought’, he can sell futures then, and vice-versa.

For trading with gold futures, the investor must open an account in a broker, as well as deposit some cash as guarantee, according to the number of contracts to be traded. Brokerage fees change depending on the broker, but use to follow a market standard. Also, gold futures generate daily settlements, so the investor is daily credited or deducted depending on market moves.


5. Characteristics

Terminology

Gold futures terminology is found from the following factors:

1. Gold futures trading code is “OZ1”.

2. The letter corresponds to the expiry month, as follows:

Month

Letter

January

F

February

G

March

H

April

J

May

K

June

M

July

N

August

Q

September

U

October

V

November

X

December

Z

*International Standards

3. Expiry year.

Example: for dealing with gold futures expiring by August 2014, we have the following code:

OZ1 Q 14

Contract

Gold futures have the following characteristics:

Trading code

OZ1

Trading unit

Standard Lot of 250g of fine gold

Quotation

BRL per gram, up to 3 decimal places

Minimal daily change

R$ 0.001 per net gram

Max daily change

5% over the third sequential expiring date

Standard Lot

1

Limits

3,000 contracts or 20% of opened positions to each expiring date

Trading schedule

9am –   6pm (Regular trading)

Last trading day

Last work day of the expiring month

Guaranty Margin

Fixed value per contract paid on D+1, with a 20% discount margin for hedging
operations

Day Trade

It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of OZ1 futures. The financial settlement of day trades is automatically performed on the first business day following the date of closing of the business.

Daily Settlements

The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.

For OZ1 contracts, the daily adjustment happens the day after the deal, or D+1. However, on the expiry date only, updates are made in the same day, or D+0.

Guaranty Margin

It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate options, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.

The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.

Operational costs

Costs from trading OZ1 futures are:

Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa. In this case, the cost will be 0.25% for normal operations and 0.10% for Day-trade.

Stock exchange fees – that includes emoluments and registering fees by BM&F, charged as follows:

Emoluments: The fees charged by the BMF values ​​related to trading services. They focus on contract negotiation (opening or closing position before maturity), exercise of options, registration and early settlement and assignment of rights procedure. Gold futures contracts, the fees are charged according to the following table:

Number of contracts

Range value

From

To

US$

1

10

0,33

11

50

0,31

51

130

0,29

131

150

0,28

151

300

0,27

Over 300

0,24

Liquidation charge: this charge regards to the liquidation of the contracts by the expiry, on top of clearing expenses. Usually, this charge is a fixed value, and has nothing to do with the volume of contracts negotiated. For OZ1 contracts, the fee reaches BRL0.58 per contract.

Clearing fees: include all costs for following positions and receiving reports and filings made by the clearing house, as well as operational costs for holding inactive positions on derivatives. It affects all positions opened in contracts traded in the primary market (except for options and minicontracts) and OTC contracts. The fees are daily updated, and charged in the last work day on each month, by closing the positions or every time an investor transfers all positions to another one.

Fees are based in the number of positions opened by the calculation day, and can vary depending on the volume of contracts traded.

For OZ1 contracts, the fees reach 0.0257% per contract and day.

Registry charge: a value charged to register the operation on the clearing house, that only applies to deals that open or close positions before the expiry date, and charged one day after those events.

The table of prices for registration is disclosed by the stock exchange based on average deals for the latest 21 trading sessions. Calculations are made in the last trading session of a week, and define registration charges for the following week.

Currently, registration charges for OZ1 futures are estimated as follows:

Number of contracts

Range value

From

To

US$

1

10

0,24

11

50

0,23

51

130

0,22

131

150

0,21

151

300

0,19

Over 300

0,17

Maturity

Gold futures can be set to expire by any month. Expiration dates and last trading dates coincide to the last work day of the expiry month.

Liquidation

By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held.


6. Profitability and risks

Determine exact profits from investing in gold is not possible, as prices are freely dealt within the markets. Historically, gold prices keep increasing, with ups and downs from time to time. The major trend, though, is that the gold keeps a high value on time, as the metal remains scarce and highly demanded. However, that doesn’t mean prices will be always hiking up, and many times drops can happen, leading to considerable losses.

Risks from investing in gold comprise the unpredictable moves from its pricing, highly influenced by international market conditions, as well as the metal and the dollar quotations worldwide. Also, carrying gold is a dangerous activity, as the metal is frequently a target of robbery.


7. Taxation

Gold investments are subject to an income tax of 15%. The tax is due to any profits accounted by individuals who sell, monthly, BRL20,000.00 in gold assets or more. Payments must be made by using a local receipt named “carnê-leão”.

For any sales amount below BRL20,000.00 per month, individuals are exempt of paying income taxes.


8. Advantages

  • Gold is a scarce material and keeps its value over time;
  • Diversification;
  • Protection from crisis and high inflation rates;
  • Hedge dollar and stock exchange colapses;
  • Exemption of income tax to the limit of BRL 20,000.00 per month;
  • Possibilities to invest through a fund, for those with lower resources.

9. Disadvantages

  • Volatile and risky investment, not indicated for those who are more conservative and averse to risks;
  • High investment amounts (if not through investment funds);
  • Not covered by the guaranty fund (FGC);
  • Unsafe, subject to robbery and criminal actions.
  • Low liquidity;

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