Gold Futures - What is It?
Gold futures trading
When it comes to investing, gold futures is another way to get good returns. The major world gold futures exchanges are COMEX in New York and TOCOM in Tokyo.
Gold futures trading is inexpensive, transparent and convenient. Some sources predict high profitability of it because gold speculators have short term requirements and because the availability of gold is scarce.
It is expected that price of gold will reach $2000 per ounce by 2015.
Implicit financing cost in a futures price in gold futures trading
You need to understand that gold futures contract price in practice is different from spot gold. The difference however is not a profit or loss.
Because of the nature of gold future trading it just represents variation of costs of borrowing dollars and gold. This is always bound to the date of buying and to the date of future settlement.
For some reason gold is cheaper to borrow than dollars. In such a case, the spot price will be below the gold future.
In some cases gold can be more expensive to borrow - then gold futures will be cheaper than the spot gold.
In gold futures trading you get a timeout to pay a known quantity of dollars for a known quantity of gold.
It is an opportunity to deposit your dollars until settlement date. (You cannot deposit the gold - you don't have it yet!)
For example:
Dollars in the period will earn you 2%. Gold will earn the seller 0.5%.
You will have to pay over the spot price the difference of 1.5%.
If you didn't pay this 1.5% the seller can sell the gold for dollars and keep this difference. This 1.5% component in the price will reduce along with the futures contract approaches its expiry date.
What do you get from gold futures trading
To put it simple - gold futures trading is more attractive than spot gold trading.
If you do not want custody of gold, gold futures trading eliminates costs of settlement and storage. You need much less money to trade. Short sell - if you buy an equivalent contract back before the contract expires - and profit from a falling price. Equal notional rights for everyone stimulates the liquidity that guarantees a reliable real-time price for gold futures trading.
Risks and cost of gold futures trading
Before you commit to gold futures trading you MUST do your homework and learn as much as possible about it.
Despite all the advantages gold futures trading can be artificially volatile. That is because most of the investors would like to trade before the expiration day. So when it is closer to the time, price can go down significantly.
Gold futures trading is not a free exercise. Expect to pay about 1% for associated costs like margin finance, purchase commission and sale commission.
And remember - there is no good or bad investment - timing and expertise decide it. Good luck in gold futures trading.
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Gold Futures Trading
Gold futures is a way to trade gold bullion. The major world gold futures exchanges are COMEX in New York and TOCOM in Tokyo. Equal notional rights for everyone stimulates the liquidity that guarantees a reliable real-time price for gold futures trading.