Gold Futures: Basics, Pros & Risks Associated

August 1, 2022
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Gold Futures: Basics, Pros & RisksAssociated

Gold is a commodity that has a very important place in the imaginations of billions of people across the globe because of the precautionary hoarding of this precious resource by governments and private citizens alike. There is no longer any need to physically store this precious metal because of the ease with which it can be purchased and sold at a wide range of gold prices via numerous media. Gold futures is a term that is rising in use, albeit not yet known by everyone. One of the most common ways to trade gold is via gold futures.

What exactly are gold futures?

There are several options for people to invest in gold. Trading gold futures is one of the choices. Futures are monetary contracts between sellers and buyers.

The seller and the buyer have agreed on a future price for the sale of an asset. Trading in gold futures began in 1972 on the Chicago Mercantile Exchange. It is presently one of the most frequently traded commodities on major exchanges all over the world. Futures contracts maybe used to buy various goods and commodities, gold included.

Futures are standardized legal contracts that are traded between parties on exchanges. Once the contract has been signed, no changes may be made to the price or the date.

One of the most appealing aspects of gold futures is that you don't have to pay the full price to make a deal. The parties have agreed on the asset's purchase and sale specifics, including the purchase price, delivery date, and minimum purchase quantity.

A gold futures contract is a legally binding agreement between two parties to provide an agreed-upon amount of gold at a certain future date, usually after receiving an up-front payment. However, there main amount of the contract is paid upon completion of delivery. However, the seller is not bound to take delivery of the gold until a later date.

Many investors prefer purchasing gold futures over investing in exchange-traded funds (ETFs). As opposed to exchange-traded funds (ETFs), investing in gold futures is straightforward since traders may purchase and sell the precious metal whenever they choose. Investors in gold futures can also purchase the underlying commodity at any time.

How to get started with gold future trading

Trading futures is not a hobby for novice traders. Reputed brokers need proof of sufficient capital and trading expertise from new clients before allowing them to open a long position. You need to have at least $2,000 in your trading account to day trade gold futures contracts on most platforms, plus additional funds to cover margin losses.

When you're ready to start trading gold futures, you must call or visit the offices of your selected brokerage. Before risking real money, it is wise to try out your trading technique using a trading simulator, like the one offered by CME Group.

Gold Futures: benefits and risks

Gold futures bets are a classic example of high-risk, potentially lucrative investments. We have created a list of the most often cited advantages of trading gold futures over purchasing gold bullion or paper-backed gold.

The benefits

●    There's no need to use an external vault or storage facility to keep your information safe.

●    Investors with little funds may close massive acquisitions because of the availability of leverage.

●    large quantity of accessible cash

●    Provisions that allow short sales

●     Futures contracts have the added benefit of allowing investors to hedge against the risk of variations in the prices of macro economic commodities. When corporations or investors engage in futures trading on an exchange, the risk is transferred to the investment banks, who are, in theory, better equipped to deal with it.

The risks

Unlike investing in physical gold, which is a passive asset, trading in gold futures requires active participation from the investor and hence is best left to those with sufficient trading expertise. Most of those who invest in gold futures end up losing money. This occurs when novice traders take on too much risk via leverage.

Picture a novice trader with a starting capital of $10,000. They may purchase around five ounces of gold bullion at the current spot price or put down $10,000 as a margin on a $100,000 gold futures contract.

If the underlying asset were to increase in value by only 5%, the investor would profit $500 by holding bullion. However, had the investor placed their money in gold futures, they would have reaped a$5,000 profit thanks to the investing power of leverage.

Despite the apparent benefits, imagine if prices suddenly started going down. Those who have gold in the form of bullion should expect a loss of just $500 in value and can wait for spot prices to rebound in the future. Nothing is ever truly lost. If you trade a losing gold future, you must close your position and forego half of your margin at a loss of $5,000.

Since gold prices have generally been on the rise over the last 30 years, losing $5,000 on a gold future is especially distressing. Losing hundreds of dollars on a commodity likely to follow its pre-sale trend is tough for even the most seasoned investors to tolerate.

Final thoughts

It's much too easy for gold-futures traders to get their hopes up. Even rational and cautious investors in gold run the danger of having their savings wiped away by an unexpected increase in the commodity's price. That's why inexperienced investors should avoid gold futures and instead consider diversifying their exposure to the metal in other ways until they have amassed sufficient capital to bear the risk of a complete loss.

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