What are gold futures? Are their characteristics similar to those of other types of futures or do gold futures stand out? Welcome to today’s article in which we shall learn about what these assets are, and what you stand to gain or lose by investing in them. Read on to find out more.
What are gold futures?
For investors interested in venturing into the gold market, there are quite a number of ways to invest in this precious metal. One key strategy is through gold futures. Simply put forward, futures are a financial contract that exists between a buyer and a seller. The investor duly agrees to purchase an asset from the seller at an agreed-upon price based on a date set in the future.
Back in 1972, the Chicago Mercantile Exchange launched futures trading in seven notable currencies, but it wasn’t until 1974 that the first gold futures contract was traded on the COMEX in New York, USA. Since then, gold futures have experienced notable growth in popularity as an investment strategy among various stock markets.
Understanding gold futures investing
Basically, gold futures are compelling. As an investor, you have the opportunity to trade the commodity without having to pay the whole amount right away. An agreement is met between two parties, including the gold spot price, the amount of gold, and the future delivery month.
In easier terms, gold futures can be described as a contract in which an individual duly agrees to take gold at a specific date by rendering initial payment, with a deal set in place to complete the assignment. As a cheaper alternative to bullion coins and mining stocks, gold futures are offered in 100 ounces, 33.2 ounces, and 10 ounces. You could always purchase the packet of your choice.
Many people view gold futures as an alternative to investing in gold exchange-traded funds (ETFs). And like all other ETFs, gold ETFs act in the same manner as individual stocks, implying that investing in a gold ETF is similar to trading stocks on an exchange. There exist two main types of gold ETFs: those that track any price changes that the metal undergoes and those that deal with investing in certified gold companies.
ETFs that follow the price of the yellow metal offer investors access to gold by holding either physical gold bullion or gold future contracts. This entirely means that investing in these gold ETF platforms does not permit investors to possess any physical gold- even a gold ETF that tracks physical gold cannot be redeemed for actual gold, generally.
Why do most people invest in gold futures, therefore?
Many market people prefer investing in gold futures because, in contrast to ETFs, futures are straightforward. Investors can freely buy or sell gold at their discretion without a management fee, and taxes are split between short-term and long-term capital gains. Again, there are no third parties making decisions on behalf of the investor, and at any time, investors can own their underlying gold.
Where are gold futures traded?
In the US, investors can openly buy or sell gold futures contracts on the New York Mercantile Exchange (NYMEX) in contracts of 100 troy ounces that are normally quoted in US dollars per ounce. For example, US$1 is equivalent to US$100 per contract, with a recorded minimum fluctuation of 10 US cents, or rather US$10 per contract. Typically, NYMEX contract months include February, April, June, August, October, and December, with trading ending on the third to last business day of the delivery month.
Another place where gold futures can be traded is the Tokyo Commodity Exchange, where the stipulated contract is 1 kilogram per contract, which is approximately 32.15 troy ounces. As of July 2017, gold and silver futures trading has been available at the London Metal Exchange. The contract size of the London Metal Exchange gold futures is 100 fine troy ounces.
Rewards and Risks
Like any item of trade, there are rewards and risks to gold futures investing, and it’s upon market participants to apply their own discretion when making any investment decision. Below are some tips for investors to keep in mind when considering this opportunity.
Rewards of gold futures investing:
- As highlighted, trading gold futures allows investors the flexibility of only paying a certain amount when a deal is met, and then paying the remaining amount on the agreed-upon date.
- That momentarily means that if investors are capable of selling quickly, it’s probable they will never pay for all the gold they bought. Rather, they will likely pay an extra 2% upfront, while any loss will be adjusted on down payment and paid back in net.
- Tracking the worth of a futures contract is as cheap as simply following the exchange price.
- Investors don’t need to keep gold futures stored anywhere- at least as long as they don’t assume the position of the physical gold.
Risks of gold futures investing:
- The gold futures market can be volatile. There exists the possibility of it collapsing.
- On that note, the gold price is constantly fluctuating over time. This, therefore, means that an investor may lose money if a large drop in the price from the time their agreement is made to the date of delivery is experienced.
- Similarly, gold futures have a “built-in” price differential, which is capable of skewing their true value. For instance, if an investor signs a futures contract at US$150 above the stipulated gold price 30 days before closure, its value will drop approximately US$0.05 per day till the closing date.
- Default risk- which means that someone may be entitled to a profit but can’t collect it.
Gold Futures Expiry
Another important aspect to take into consideration before opting for Gold Futures is that these are dated instruments that too have an expiry date. These commodities stop trading before their agreed-upon date is reached. All dealings will therefore be suspended before the settlement date, ensuring that individuals have adequate time to think about their current position.
Gold futures offer the promise of more profits, but you can unlock the promise of safety by investing in physical gold. Open a gold IRA today and get started with gold investing!
That will be all for this post on what gold futures are. There exist high rewards and high risks with gold futures investing, meaning that they are certainly not for everyone. With this in mind, there are ongoing trading opportunities linked to gold futures, and alternatively, there are other investment opportunities ranging from stocks, coins to gold bullion. Check out my top-recommended option in the links above to get started on the right foot.
I wish you well,
Eric, Investor and Team Member at Gold Retired!