Metal in a vault, a listed product that holds metal, and a dated contract on metal are not three versions of one investment. They differ in minimum size, cost, storage and who owes you what.
9 min read · Level 3
The thing that makes this class genuinely distinctive is a property nobody markets, because it sounds too modest: it is the only asset in this curriculum that is not somebody's promise. A share is a claim on a company, a bond on an issuer, a deposit on a bank, a fund on a structure, a building's income on a tenant. Every one of those depends on an arrangement continuing to work, and most of the time arrangements do work, which is why the distinction usually seems academic. A bar of metal in a vault is not an arrangement. It does nothing, it produces nothing, it owes nothing, and it will still be there if every institution in the chain fails. That is the whole product, and I think it is worth stating plainly rather than dressing up as an inflation strategy - because once it is stated plainly, two things follow that are otherwise hard to see. The first is that the holder is paying real money, every year, for that property specifically, and should be able to say why they want it. The second, and this is where most buying in this class goes wrong, is that the listed product and the futures contract do not have that property at all. They are exposure to the price, which is a perfectly reasonable thing to want, and they are promises like everything else. Buying one of them for the reason that belongs to the other is the most common error here, and it is invisible precisely because the price chart looks the same.
A commodity is a physical good that is substitutable unit for unit: an ounce of a refined metal is an ounce of that metal, wherever it came from. That is what makes it tradeable at a single global price, and it is also what makes it completely unlike a share. A share is a claim on one particular company. A tonne of copper is a tonne of copper.
Take Metal M throughout this subject, at a spot price of 2,000 a unit, and suppose the reader has 50,000 to put into it. Three routes, and the differences are not marginal.
Physical. You buy bars or coins and somebody stores them. Dealers sell above the spot price and buy below it, so the round trip is a real cost before anything happens:
Bought at a 4.0% premium to spot 50,000 buys 48,076.92 of metal at spot value Sold at a 2.0% discount to spot at an unchanged spot, proceeds are 47,115.38 Round trip loss 2,884.62 which is 5.7692% of the outlay
For the outlay to be recovered, the spot price must rise 1.04 / 0.98 - 1 = 6.1224%
Then storage. Metal in a professional vault typically costs a stated percentage a year, plus insurance. Metal at home costs nothing visible and may not be covered by a household policy, which is a cost you discover once.
An exchange-traded commodity. A listed product that holds the metal and issues units you buy like a share. Minimum is one unit, the spread is small, and the annual fee is deducted from the holding rather than billed. At 0.40% a year:
After ten years, 0.996^10 = 96.0712% of the holding remains The fee has consumed 3.9288% of it, whatever the price did
What you own depends on the structure: a product holding allocated metal - specific bars recorded against the product - is a different thing from one holding an unallocated claim, and different again from one holding contracts rather than metal.
A futures contract. An agreement to take or make delivery of a stated quantity at a stated future date. One contract on 100 units of Metal M is a notional 200,000, and the deposit required to hold it might be 10,000:
Notional 200,000 Margin at 5.0% 10,000 which is leverage of 20 times A 2% adverse move 4,000 which is 40% of the margin A 5% adverse move 10,000 which is the whole of it
And the contract has a date. Holding the exposure past it means closing one contract and opening another, which is lesson three and is where most of the surprises in this class live.
Because the three routes are sold as though they were interchangeable ways to hold the same thing, and the only row on which they genuinely match is the one nobody can control.
Put them side by side:
Physical Listed product Futures Minimum a bar or coin one unit one contract Entry and exit cost about 6% round a small spread commission plus spread Ongoing cost vault plus an annual fee financing in the price insurance taken from units plus rolling Who owes you nobody - you the issuer, under the clearing house and hold the metal its own structure your broker Leverage none none built in Expiry none none every contract has one Can you hold it yes no no
Read the fourth row first, because it is the one that separates a physical holding from everything else in this curriculum. A bar in a vault is not a promise. It does not depend on an institution remaining solvent, it pays nothing and it owes nothing, and that combination is why this class is reached for when people stop trusting promises. It is a genuine property and it is the whole of the case for the physical route.
It is also why the physical route costs the most. Somebody has to hold the thing, insure it, verify it and stand behind its authenticity when you sell, and all of that is charged for. The 5.7692% round trip and the annual vaulting are the price of not being owed anything by anybody.
The listed product removes most of that cost and reintroduces a counterparty. You now hold units in a structure, and what protects you is the legal arrangement it operates under - whether the metal is allocated to the product, who audits it, and what happens if the issuer fails. That is a document question, and it is the single most useful thing to read before buying one.
The futures route is different in kind rather than in degree. It is the only one where a price move can cost you more than you put in, and the only one with a date attached. Twenty times leverage means a 5% move against you removes the whole deposit, and a 2% move removes 40% of it - which is why this route belongs to people who have decided to take that risk deliberately, and is a trap for anybody who chose it because the entry cost looked lowest.
One more difference that matters and is easy to miss. Only the physical route gives you the good itself. If the reason for holding is that you want a thing that exists when other arrangements do not, a unit in a listed product and a contract with a broker are both promises, and both depend on the system continuing to work. That does not make them worse investments. It makes them different answers to the question that usually prompted the purchase.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
The same 50,000, three ways, one year, with the spot price ending exactly where it started at 2,000.
Physical. 50,000 buys 48,076.92 of metal at spot value after the 4.0% dealer premium. Vaulting and insurance at 0.65% take 312.50 over the year. Selling at a 2.0% discount to an unchanged spot returns 47,115.38 less the vaulting already paid. The holder is down about 6.4% on a year in which the price did nothing at all, and everything they paid for was delivered: a real bar, stored, insured, and bought back on demand.
Listed product. 50,000 buys units, less a small spread. The 0.40% annual fee takes 200.00 over the year, deducted from the holding rather than invoiced. The holder is down about 0.4% plus the spread, on the same unchanged price.
Futures. 50,000 of deposit supports five contracts on 500 units, a notional 1,000,000. At an unchanged spot the position makes nothing from the price and still has to be rolled four times if the exposure is held for a year through quarterly contracts, which in the curve shape lesson three describes costs 5.4094% of the notional - 54,094 against a deposit of 50,000.
Those three outcomes, from an identical view about an identical metal over an identical year in which the metal did nothing, range from down 0.4% to more than the entire deposit.
The point is not that the listed product wins. It is that the question "should I own this commodity?" and the question "which of these three should I use?" are separate questions, and the second one has a larger effect on a one-year outcome than the first. Anybody who answers only the first has left the larger decision to whichever route was easiest to click.
And notice what the physical route bought for its extra cost: the only version in which nobody owes you anything. Whether that is worth roughly six per cent and an annual charge depends entirely on why you wanted the metal, which is lesson six.
Comparing the three routes on the entry cost. The futures route has the smallest visible cost and the largest risk, because a 5% adverse move on 20 times leverage removes the whole deposit. Entry cost and total cost are different quantities, and in this class they rank the routes in opposite orders.
Treating a listed product as identical to holding metal. You hold units in a structure, and what stands behind them is a legal arrangement rather than a bar. If the reason for buying was to own a thing that owes nothing to anybody, the listed version does not deliver that reason.
Budgeting the spot price. Physical metal is bought above spot and sold below it, so 50,000 at a 4.0% premium buys 48,076.92 of metal, and an unchanged price returns 47,115.38 after a 2.0% selling discount. The spot price is a reference, not a transaction price.
Forgetting that storage is a running charge on an asset that pays nothing. Every other income-producing class in this curriculum funds its own costs out of what it produces. This one does not, which is lesson two.
Assuming a futures position can simply be held. Every contract has a date, and maintaining the exposure means rolling into the next one, repeatedly, at whatever the curve costs at the time. That is not an administrative step; lesson three shows it is often the largest single number in the outcome.
If the reason is that you want a physical thing that owes nothing to anybody, only the physical route delivers it and the extra cost is the price of that. If the reason is exposure to the price, a listed product delivers it for a fraction of the cost. These are different reasons and they select different instruments.
Physical: the dealer premium in, the dealer discount out, and the vaulting per year - for Metal M that is 4.0% and 2.0%, a 5.7692% loss on the outlay requiring a 6.1224% rise to recover. Listed: the spread plus the annual fee, 0.40% a year consuming 3.9288% over a decade. Futures: commission, spread and the cost of every roll.
Allocated metal recorded against the product, an unallocated claim, or contracts rather than metal at all. The three behave differently and only the first one is a holding of the good itself. This is in the product documentation and takes twenty minutes to establish.
Before a first purchase in this class, when comparing a listed product against buying physical metal, and whenever somebody describes a futures position and a metal holding as the same exposure.
Do not use this lesson to decide how much of this belongs in a portfolio - that is lesson six - and do not read the physical route's higher cost as a verdict against it. What it buys is real and is the reason many holders choose it.
Physical metal is bought at a premium to the spot price and sold at a discount to it, and the two are separated by however long the holding lasts, which makes them feel like unrelated events. Buyers commonly note the premium at purchase, accept it as a one-off cost of entry, and then measure their position afterwards against the spot price rather than against what they would actually be paid for it. The gap is only rediscovered at sale, frequently years later, when the dealer's bid turns out to sit below the number the holder has been watching. Nothing was hidden at any stage and both sides of the spread are published. What makes it persistent is that the spot price is the figure quoted everywhere, and it is the one price at which no retail transaction in physical metal ever happens.
Track a physical holding against the dealer's current bid, not against the spot price. The spot price is a reference nobody will pay you.
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