For those interested in the gold sector, gold futures can be a rewarding investment. Learn how to leverage this opportunity.
For investors looking to step into the gold space, there are a number of ways to invest in the yellow metal. One way is through futures, which is a common strategy among many commodities.
Putting it simply, futures are a financial contract between an investor and a seller. The investor agrees to purchase an asset from the seller at an agreed-upon price on a date set in the future.
In 1972, the Chicago Mercantile Exchange launched futures trading in seven currencies, but it wasn’t until 1974 that the first gold futures contract was traded on the COMEX exchange in New York. Since then, gold futures have continued to grow in popularity as an investment strategy within the sector.
Gold futures investing
Gold futures are compelling because they give investors the opportunity to trade gold without having to pay the full amount right away. An agreement is made between two parties, including the price and weight of gold, and a delivery date — set in the future — is decided upon.
In other words, gold futures can be described as contract in which an individual agrees to take gold at an agreed date by making an initial payment, with an agreement set in place to complete the payment.
A Daniels Trading publication notes that gold futures are offered in 100 ounces, 33.2 ounces and 10 ounces, and are an “alternative to bullion coins, mining stocks and leveraged bullion dealers.”
Where they are traded
In the US, gold futures can be traded on the New York Mercantile Exchange (NYMEX) in contracts of 100 troy ounces and are quoted in US dollars per ounce. For example, $1 equals $100 per contract, with a minimum price fluctuation of 10 cents, which equals $10 per contract.
Typically, NYMEX contract months include February, April, June, August, October and December, with trading closing on the third-to-last business day of the delivery month.
Another place gold futures can be traded is the Tokyo Commodity Exchange, where the contract size is 1,000 grams and is quoted in yen per gram.
Rewards and risks
There are rewards and risks to gold futures investing; however, they may not necessarily apply to everyone. Still, it’s important for investors to use their own discretion when making a decision.
Here are some tips for investors to keep in mind when considering this opportunity.
Rewards of gold futures investing:
- As mentioned, trading gold futures allows investors the flexibility of paying a certain amount when the deal is made, and then paying the remaining amount on the agreed-upon date;
- That means if investors are able to sell quickly, it’s likely they will never pay for all the gold they purchased. Rather, they will likely pay 2 percent up front, while any loss will be adjusted on a downpayment and paid back in net;
- Tracking the worth of a futures contract is easy, simply by following along with the exchange price;
- Investors don’t need to keep gold futures stored anywhere — at least not right away.
Risks of gold futures investing:
- The gold futures market can be volatile, which means there is the possibility for collapse;
- On that note, the gold price is constantly fluctuating. This means that an investor may lose money if there is a large drop in the price from the time their agreement is made to the date of delivery;
- Similarly, gold futures have a “built-in” price differential, which can skew their true value. For example, if an investor signs a futures contract at $1.50 above the gold price 30 days before closing, its value will drop approximately $0.05 per day until the closing date;
- Default risk — which means someone may be entitled to a profit but can’t collect it.
Why gold futures?
There are high rewards and high risks with gold futures investing, meaning they are certainly not for everyone. That being said, CME Group notes that they “provide global gold price discovery and opportunities for portfolio diversification.”
CME Group further adds that there are ongoing trading opportunities associated with gold futures, and says they are an alternative investment opportunity from stocks, coins and gold bullion.
Would you invest in gold futures? Let us know in the comments below.
This is an updated version of an article first published by the Investing News Network in 2016.
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Securities Disclosure: I, Amanda Kay, hold no direct investment interest in any company mentioned in this article.