A RALLY in the price of gold towards the end of 2009 began speculation that the commodity downturn was over and fuelled the belief that the financial markets were starting to recover. Now, after growing a mere 0.1 per cent in the last three months of December 2009, the UK economy has officially crawled its way out of the deepest recession since the 1930s. So what has happened to the price of gold since the highs seen in 2009? And how can investors effectively gain exposure to this popular market?
Now trading at around $1,100 per ounce, gold has dropped approximately 11 per cent from a high of $1,226 in early December. Analysts disagree whether this is a sign of a potential bearish stint, the classic slump that follows a bubble, or simply a temporary dip in the price of gold.
Whatever your market view or risk appetite, movements in the price of gold can provide keen investors with an opportunity for covered warrant investment. Covered warrants give investors geared exposure to gold. They are also listed on the LSE and priced in sterling.
If you have the opinion that the price of gold is likely to start rising again, then you would look to buy a call covered warrant. If however you have the opposing view and believe the price of gold will begin to fall, then you would choose a put warrant.
Covered warrants provide geared exposure to an asset, while strictly limiting losses to the initial investment. In comparison to other geared products, where losses are unknown this is a major advantage.
In addition to this, it can be difficult for investors to gain exposure in sterling to major commodities such as gold, silver and oil. Using covered warrants makes it possible for investors to take positions on the most popular commodities, such as gold, in small sizes.
Covered warrants are listed in sterling so investors bear currency risk on fluctuations in the dollar-sterling exchange rate. Covered warrants therefore provide investors with an easy-to-access financial tool, traded on the LSE, that gives exposure to the often difficult to access but infamous gold market.