The trading of gold futures is just as popular, if not more popular, than the trading of gold itself. It often costs much less, there is less risk, and there is the chance of a much larger return. However, as with all positives, there is also a great deal of negatives.
A future is also known as a “futures contract”, and it is a contract to buy (or sell) a certain quantity of a certain investment at a certain price on a definite date in the future. Futures contracts are bought and sold on the futures market, which is an exchange just for futures. A contract similar to futures are “forwards”. Forwards are similar to futures in that they also obligate the buyer to buy gold at a certain price on a certain day. The difference in forwards is that forwards are traded over-the-counter, and do not have to face an exchange. Futures are exchange traded derivatives, and all regulations, such as margin requirements, are set by the clearinghouse of the exchange.
People often get the terms “futures” and “options” mixed up. A future is an obligation to buy a certain commodity at a stated price, on a certain day. An option simply is a right to buy a commodity at a stated price on a certain day, and the investor is not obligation to make the purchase, they simply have the right to exercise the option if they choose to do so.
Futures are usually traded by two distinct groups. The first group is true speculators, or traders, who trade futures looking for a quick increase, at which point they will quick sell. These investors rarely stay in a position over night, and they never take physical delivery of the commodity. Quite frankly, they rarely hold a position through its expiration date, unless it becomes worthless. Speculators also often trade options on futures, which is simply the right to buy or sell a futures contract at a certain price. The second group of investor would be hedgers. Hedgers are investors that buy futures to protect, or hedge, a large position they hold in that commodity. Someone with an extremely large position in gold would trade futures as a way of protecting their investment, and hedging against large price changes.
Many investors prefer to gold futures trading as it eliminates the need to deal settlement issues, and to the large investor, this greatly lowers costs. Furthermore, it costs much less to trade futures than it does to trade actual gold bullion. Whereas one ounce of gold can cost around $1500 for an ounce, one future contract would cost exponentially less. Gold futures also allow short selling, whereas gold trading does not. Lastly, the market for futures is much faster and more liquid than the gold market, which makes opening or closing a position much easier, especially if you need to get out fast.
There are also disadvantages to trading gold futures. Because of the way futures are managed, there are many hidden costs associated with trading them. Because of this, the future market can often be artificially volatile, making the true worth of the investment questionable. Furthermore, gold futures are more susceptible to instability than gold itself because in a sudden free fall, gold will always carry its intrinsic value with it, whereas futures don’t have that advantage.
In all honesty, the advantages outweigh the disadvantages by a great deal, and for the most part, trading gold futures is a fantastic way for an investor to trade gold. As with all investing, it is best that you do your homework, and thoroughly investigate all avenues before you start investing. However, in general, gold is a very safe investment, as are its future contracts.
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