Gold Futures and Options
Individuals who are interested in trading gold are
making a good choice, particularly in these troubled
economic times: Gold typically holds its value, and
gold-trading platforms (particularly online gold-trading
platforms) have proliferated in recent years, making
it easier than ever to trade gold. But before you get
started, you will need to understand the ways in
which you can trade gold.
First, you can trade gold on the world’s stock exchanges
in the form of securities that are generally referred to as
exchange-traded funds (ETFs). Many gold ETFs are
backed 100% by physical gold (such as bars and bullion),
and are designed to track the gold price almost perfectly.
A vastly more popular way to trade gold, however, is to
use gold futures or gold options. A gold future is a firm
commitment to deliver, or take delivery of, a specific quantity of gold on a specific date at a specific price. Similarly, gold options give you the right to deliver, or take delivery of, a specific quantity of gold on a specific date at a specific price—but not the obligation.
With both gold futures and gold options, you make an initial deposit—which amounts to a fraction of the underlying gold’s price—to buy the futures or options. Instead of delivering or taking delivery of the gold, however, you sell the contract, ideally for a profit.
Note that these vehicles are used by speculators to make money on swings in the price of gold. But they can also help hedge, or minimize, risk. For example, gold options are often used by gold traders to hedge against a rise or fall in the price of gold. To illustrate, let’s say you purchased gold at $800 an ounce and are worried it will fall in value. By paying a relatively small fee, you can obtain the option to sell that gold at, say, $750 per ounce. That way your loss is limited to $50 per ounce—and it only cost you a fraction of the price of the gold itself.
Gold futures contracts and gold options contracts are traded on regulated commodities exchanges, the largest of which are the CME Globex (previously the New York Mercantile Exchange Comex Division), the Chicago Board of Trade and the Tokyo Commodity Exchange.
Finally, note that in addition to trading gold with futures and options, you can trade so-called spot gold, which lets you take a long or short position in gold while simultaneously taking the opposite position in the U.S. dollar (much like trading forex pairs). We’ll talk about trading spot gold more in another article.
