Quick answer: Probably not. But let’s put the professionals and cons under the microscope.
The gold market may be played in numerous ways. You can get gold bullion bars or coins. You can get 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 will find other forms of “paper” ownership of gold.
A commodity futures contract is one form 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 cost will fall? It’s easy to go short and profit if the cost drops. Compared to physical metals, futures trading can be a quick and easy proposition.
But futures markets also include some serious disadvantages.
Leverage Futures are highly leveraged. Meaning that you simply have to put on a portion of a contract’s value – the margin – to “own” it. Currently, you are able to 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 eliminate your complete margin. This loss in margin because of leverage is often caused by 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 worthiness of the holdings by going short in the futures markets. These hedgers and producers of gold tend to be the more expensive players in the futures markets – and they often less leveraged and therefore more powerful than the little speculator – you. Market power can be a decisive factor; especially 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 essential to clear futures trades. Because futures contracts typically expire every month or two, they must be rolled regularly- thus incurring more commission expense. Any savings because of lack of 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 made for hedging and quick speculation. Understanding the difference can help you save money.