Gold Futures Trading: A Brief Guide
Investing in gold futures does not involve gold to exchange hands. A gold future refers to an agreement by the buyer to buy a specific quantity of gold at a pre-determined price at a future time. Gold futures are the best way to gain leveraged exposure but are unpredictable. Gold futures are a fascinating and important realm, but they do not deserve the level of mysticism and fear they seem to generate. The futures priesthood that ‘informs’ gold-stock investors often takes events out of context and disseminates half truths designed to sway sentiment.
Gold’s importance in world markets make COMEX Division gold futures and options an important risk management tool for commercial traders. Traders watch Comex contracts as an indicator of froth in the market. Trading gold futures securities happens mostly on paper: most of the gold purchased or sold in the futures market never moves. Gold futures are typically traded 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 asset. Trading gold futures also has low commissions.
Gold options are also powerful and cost-effective investing tools, that can be used to own desired quantity of gold in future, and can also be used to hedge price changes of gold that you hold. Every futures contract is for 100 troy ounces.
Prices in a structured derivatives market reflect the perception of market participants regarding the future and lead the prices of underlying to the perceived future level. The prices of derivatives join with prices of the underlying at the expiration of the derivative contract. Prices swing 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 set for the spot gold, including delivery, to be paid two days after the date of the actual contract.
In closing, let me stress again that gold futures are not a risk free financial commodity and should be considered judiciously. Investments should only be made with risk assets which is capital you could afford to lose and it would not cause you to change your existence in any manner.
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