Tokens vs Futures: Choosing the Right Product for Gold Exposure

Gold-backed tokens and gold futures are two different ways to track the price of gold. A token such as PAXG or XAUT is a claim tied to physical bullion in a vault, with no expiration date. In contrast, a gold futures contract, like CME's benchmark GC, is a standardized derivative that expires on a set date and usually requires only a margin deposit, not full payment upfront.

The main difference between these two products lies in their structure and the level of exposure they offer. Gold-backed tokens give physical ownership through an issuer/custodian structure, while gold futures positions are derivative contracts with inherent leverage and expiration dates.

Gold-backed tokens track the spot price of gold because they're issued against physical bullion, and their creation/redemption process links the token's market price to the metal's value through arbitrage. However, prices can drift from underlying gold value due to exchange liquidity, bid-ask spreads, redemption friction, blockchain network conditions, and geographic or KYC restrictions.

Futures, on the other hand, don't simply mirror today's spot price. Their price can also reflect the cost of carrying gold to the contract's expiration, including financing, storage, and insurance. This gap is called the basis, which can result in contango (prices above spot) or backwardation (prices below spot).