In case you Trade Gold Futures?

Quick answer: Probably not. But let’s put the professionals and cons under the microscope.

The gold market can be played in a number of ways. You can buy gold bullion bars or coins. You can buy shares in gold funds – including exchange-traded funds (ETFs). You will find gold mining and processing stocks which benefit to varying degrees from higher gold prices. And there are other types of “paper” ownership of gold.

A commodity futures contract is one form of paper ownership. Gold futures offer some distinct advantages for many traders. Storage investing, insurance and transportation of the physical metal don’t drive up costs – because normally there’s no physical metal. No metal also means no counterparty risk due to loss or counterfeiting. Think the cost will fall? It’s easy to go short and profit if the cost drops. In comparison to physical metals, futures trading can be quite a quick and easy proposition.

But futures markets also include some serious disadvantages.

Leverage Futures are highly leveraged. Which means that you simply have to put on a portion of a contract’s value – the margin – to “own” it. Currently, you can control 100 ounces of gold, worth about $140,000, with only $6700 cash. But it would just take a 5% move against your position to get rid of your whole margin. This loss of margin due to leverage is often attributed to the unusual volatility of futures prices. Futures prices are not more volatile – it’s the leverage that kills.

You’re David; They’re Goliath The futures markets exist to hedge price risk. Any large gold owner can protect the worthiness of these holdings by going short in the futures markets. These hedgers and producers of gold tend to be the bigger players in the futures markets – and they have a tendency to less leveraged and therefore stronger than the little speculator – you. Market power can be quite a decisive factor; especially when trading short term.

Commissions Add Up While you can avoid certain fees by not dealing in physical gold, there are commissions and fees necessary to clear futures trades. Because futures contracts typically expire every month or two, they should be rolled regularly- thus incurring more commission expense. Any savings due to insufficient storage costs can be easily lost by the necessity to continuously roll your position.

Speculation in gold futures is a highly leveraged trade – not an investment in gold or gold ownership. Futures are primarily made for hedging and quick speculation. Understanding the difference can save you money.

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