Quick answer: Probably not. But let’s put the good qualities and cons underneath the microscope.
The gold market may be played in several ways. You can buy gold bullion bars or coins. You can buy shares in gold funds – including exchange-traded funds (ETFs). There are gold mining and processing stocks which benefit to varying degrees from higher gold prices. And you will find other designs 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 entails no counterparty risk as a result of loss or counterfeiting. Think the cost will fall? It’s easy to go short and profit if the cost drops. Compared to physical metals, futures trading can be quite a quick and easy proposition.
But futures markets also include some serious disadvantages.
Leverage Futures are highly leveraged. Which means that you only have to hold a portion 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 just take a 5% move against your position to get rid of your complete margin. This loss of margin as a result of leverage is usually related to the unusual volatility of futures prices. Futures prices are no more 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 worth 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 often less leveraged and therefore more powerful than the small speculator – you. Market power can be quite a decisive factor; particularly when trading short term.
Commissions Add Up When you can avoid certain fees by not dealing in physical gold, you will find commissions and fees necessary to clear futures trades. Because futures contracts typically expire every a short while, they have to be rolled regularly- thus incurring more commission expense. Any savings as a result of insufficient storage costs may be easily lost by the requirement to continuously roll your position.
Speculation in gold futures is a very leveraged trade – not an investment in gold or gold ownership. Futures are primarily designed for hedging and quick speculation. Understanding the difference can help you save money.