Investments in Gold – Chapter 12: Gold Futures

This is chapter number 12 out of 15. Read the rest:

Read Investments in Gold – Chapter 1: Introduction
Read Investments in Gold – Chapter 2: Advantages of investing in Gold
Read Investments in Gold – Chapter 3: Disadvantages of investing in Gold
Read Investments in Gold – Chapter 4: Guidelines for Investing in Gold
Read Investments in Gold – Chapter 5: Investments in Physical Gold
Read Investments in Gold – Chapter 6: Bullion Bars and Coins
Read Investments in Gold – Chapter 7: Numismatic and Semi-Numismatic Gold Coins
Read Investments in Gold – Chapter 8: Gold Certificates
Read Investments in Gold – Chapter 9: Allocated Accounts
Read Investments in Gold – Chapter 10: Paper Gold Investments
Read Investments in Gold – Chapter 11: Gold Stocks

Gold futures can be bought and sold on all the major exchanges like the precious metals department of the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX), London stock exchange, Tokyo stock exchange, Sydney stock exchange and the Singapore stock exchange,

These are contracts to make or take delivery of a specified quantum and quality of gold at a mutually agreed date and price in the future. Investors in gold futures can elect to take or make delivery of the physical gold upon maturity of the futures contracts. But like in commodities futures, actual physical delivery is not the norm. The main advantage of such contracts is that they can be bought or sold on margin. With that, only a small capital outlay is required for transacting these futures contracts. Because of this, investments in futures contracts are highly dependable on the price of bullion and as a result more speculative and volatile.

The extremely high risk-reward ratio of this investment class meant that trading in gold futures contracts are usually the domain of institutional traders and hedge funds as only they have the investment funds to leverage in this market. The main objective of players in this market is to try to gauge and predict correctly whether gold prices will rise or fall in the short term period. Nevertheless commercial producers or consumers of gold also use gold futures contracts as a risk management tool.

The profitability of gold futures contracts will depend very much of the price of gold during the tenure of the contract. Because this market is a highly leveraged and fast moving market, players who do not protect themselves with stop-losses can find themselves incurring large losses in a blink of an eye. It is highly possible when such a scenario occurs, they will lose more than their original capital outlay. Novice or amateurs traders are highly cautioned not to participate in this market until they have gained enough expertise regarding the futures market.

Gold Future Options

Gold options are traded by all bullion banks which are listed with the London Bullion Market Association (LBMA). The COMEX division of the New York Mercantile Exchange is an alternative way where one can trade in gold futures options. The third alternative is to go through a futures broker. Like futures contracts, gold futures options are also used in hedging risk but in the trading of futures.

Spread Betting

Another method of gaining leveraged exposure to the precious metal market is to use spread betting. Spread betting is a method of speculating on the fluctuations of any specific events. It encompasses a bet on a market for a specific time frame. The more the market moves in your favor, the more you profit from the spread bet and vice versa. In many ways, a spread bet is like a futures contract as they imitate the movements of each other. Beside this, spread bets also have an expiry period. In the UK and Ireland, companies like Cantor Index, Delta Index and IG index offer the ability to spread bet on the price of gold. For example, the price of March gold is $675.10 to $676.10 per troy ounce. A speculator predicts that the price will decline “sell” at $675.10. With the minimum bet at $2 per point (One point = 200 ounces), say the gold price finished at $680.10 when the speculator closed his bet- his total loss would be $1000. (500 points multiplied by $2.) 

The main advantage of spread betting is that no commission is payable and it is also tax free. All gains are free from capital gain tax (CGT). One can take a bet on fluctuation in either direction. The disadvantages are that the spread range can be high and the risk exposure is also significantly increased. Furthermore, short term fluctuations are difficult to predict in any market. Again as with futures options, one can stand to lose more than one’s initial capital outlay. Thus spread betting is more for those speculators with a short term objective rather than medium term investors. 

Read Investments in Gold – Chapter 13: Technical Analysis
Read Investments in Gold – Chapter 14: The Motivations for investing in Gold
Read Investments in Gold – Chapter 15: Conclusion