What is Gold Futures Trading
As with other types of investments or commodities, gold futures are available to traders or investors who are willing to take a significant amount of risk in an effort to gain a substantial return.
A futures contract is simply a standardized contract between two parties to buy or sell a specified asset quantity at a specified date in the future at a price agreed upon today with such contracts being traded on a futures exchange. Specifically though, a gold futures contract or “option” is a right but not the obligation to buy or sell gold at a predetermined price during a specific period of time with the price of the option being determined by the price of gold plus a premium that is based on the time period left until the option expires.
The Gold Futures Market is used by both gold producers and the movers of gold to hedge their gold against market price fluctuations. In addition, they can also be used by speculators and traders as a way to make money off of gold price movements. In fact and for those who participate in gold futures trading, small gold price movements can translate into substantial gains or losses.
Gold futures are fairly easy to understand. For example: If a trader or investor has US$10,000 and believes that the price of gold will rise over the next three months, he or she has two options. The trader or investor can buy US$10,000 worth of gold and sell it when the price moves up for a small profit or he or she can buy US$10,000 in gold futures, which could be the equivalent of buying US$100,000 in gold, and make a substantial profit if the price of gold moves up.
On the other hand and if the price of gold goes down, the trader or investor who bought US$10,000 in gold will only loose a small amount of his or her investment but the trader or investor who bought US$10,000 in gold futures could loose the entire amount of their initial investment if the price of gold decreases substantially.
Gold Futures: Conclusion
In other words, gold futures offer both traders and investors a way to earn a substantial amount of money but there is also a significant amount of risks involved and hence, one should do their homework before they consider investing or trading gold futures.