Gold Futures Trading: A Brief Guide
Investing in gold futures does not require gold to exchange hands. A gold future refers to a commitment by the buyer to buy a certain quantity of gold at a pre-determined price at a future time. Gold futures are the best way to gain leveraged exposure but are capricious. Gold futures are a fascinating and important realm, but they do not deserve the level of mysticism and dread they seem to create. The futures priesthood that ‘informs’ gold-stock traders often takes events out of context and disseminates half truths intended to sway sentiment.
Gold’s significance in world markets make COMEX Division gold futures and options an important risk management tool for commercial investors. Investors watch Comex contracts as an indicator of froth in the market. Trading gold futures securities happens largely on paper: most of the gold purchased or sold in the futures market never exchanges hands. Gold futures are typically negotiated by “speculators,” traders who purchase or sell gold futures but aren’t interested in the physical gold, versus “hedgers,” who do value the gold itself as an investment. Trading gold futures also has low commissions.
Gold options are also powerful and cost-effective investing instruments, which can be used to own desired quantity of gold in future, and can also be used to hedge price moves of gold that you hold. Every futures contract is for 100 troy ounces.
Prices in a structured derivatives market replicate the perception of market participants regarding the future and lead the prices of underlying to the alleged future level. The prices of derivatives join with prices of the underlying at the expiration of the derivative contract. Prices vary based on supply and demand (although the twice-daily gold fix in London helps set a reference point for prices). The price of gold in the spot gold market-called the “spot price”-is the price quoted for the spot gold, including delivery, to be paid two days after the date of the actual transaction.
In closing, let me emphasize again that gold futures are not a risk free financial commodity and should be considered cautiously. Investments should only be made with risk assets which is money you could afford to lose and it would not cause you to change your existence in any manner.
Related posts: