Quick answer: Probably not. But let’s put the professionals and cons under the microscope.
The gold market could be played in numerous ways. You should buy gold bullion bars or coins. You should buy shares in gold funds – including exchange-traded funds (ETFs). You can find gold mining and processing stocks which benefit to varying degrees from higher gold prices. And you can find other forms of “paper” ownership of gold.
A commodity futures contract is one kind of paper ownership. Gold futures offer some distinct advantages for several 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 because of loss or counterfeiting. Think the purchase price will fall? It’s easy to go short and profit if the purchase price drops. In comparison to physical metals, futures trading can be a quick and easy proposition.
But futures markets also come with some serious disadvantages.
Leverage Futures are highly leveraged. Meaning that you merely have to hold a fraction 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 only take a 5% move against your position to get rid of your whole margin. This loss of margin because of leverage is often related to the unusual volatility of futures prices. Futures prices are less volatile – oahu is 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 the holdings by going short in the futures markets. These hedgers and producers of gold are generally the bigger players in the futures markets – and they tend to less leveraged and therefore stronger than the small speculator – you. Market power can be a decisive factor; especially when trading short term.
Commissions Add Up While you can avoid certain fees by not dealing in physical gold, you can find commissions and fees required to clear futures trades. Because futures contracts typically expire every a short while, they must be rolled regularly- thus incurring more commission expense. Any savings because of insufficient storage costs could be easily lost by the necessity to continuously roll your position.
Speculation in gold futures is a very leveraged trade – no investment in gold or gold ownership. Futures are primarily designed for hedging and quick speculation. Understanding the difference can save you money.