Futures-Based Gold ETF

In gold ETFs, bullion-backed funds receive most of the attention and assets. However, an ETF that uses futures contracts for exposure to the precious metal is getting a second look as gold goes into backwardation.

Backwardation occurs when the spot price is higher than the near future contract, and is a rare situation in gold. This market condition puts the focus on PowerShares DB Gold Fund (NYSEArca: DGL), which stands to benefit from backwardation.

Gold’s biggest backwardation since 1999 prompted a “corrective rally,” Bloomberg reports, citing Societe Generale analysts.

Backwardation is occurring amid reports of strong demand for physical gold, especially in China, after this year’s price decline.

“Backwardation is a concern in gold markets because in theory demand for physical delivery should never outweigh supply, since the amount of available gold is a known, fixed quantity. The event is not unprecedented, as it also happened during the financial crisis of 2008 – and corrected itself the following year,” Reuters reports. “The current dislocation indicates that holders of gold futures have begun demanding delivery. But because of the large amount of leverage in the market, participants are not able to deliver on their obligations.”

DGL uses futures contracts to track gold prices. Other gold ETFs such as SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) are backed by physical bullion.