Thursday, July 05, 2007

Gold Futures Trading

One aspect of gold that is getting a considerable amount of attention lately is Gold Futures Trading.

Investing in gold through gold futures trading is very different to any other forms of gold investment, such as gold coins and bars, gold bullion, shares, exchange traded funds and other investment type strategies. Here you are not investing in gold directly or in those that produce gold and at the current value, but instead are speculating on what the value of gold will be at sometime in the future and betting on that.

Gold Futures Trading is not for the faint hearted. About 90 percent of new people that venture into this precarious area loose their money. Some even loose the shirt off their backs. But by the same token, some people become millionaires as well.

So how do they do it?

Futures trading is the basic action of entering into a legal contractual agreement with another (known or usually not known) individual to exchange money or assets of some value at some time in the future and with the pre-determined price (called a futures price) based on the underlying asset. Such an asset could be stock, an interest rate even or, in this case gold.

It is an agreement to exchange the underlying asset, or equivalent cash flows, at a future date.

This is all done through a Futures Exchange. A futures exchange is an exchange which provides a marketplace where one can buy and sell specific quantities of a commodity or a financial instrument, such as a futures contract, at a specified price with the delivery set at a specified time in the future. The preset price is called the futures price and the delivery date is called the settlement price.

In other words if you enter into such a contract you are betting that the value or price of that asset or stock or gold is going to be at a certain value at a predetermined time in the future. At that time, when the contact is completed and 'settlement date' arrives, you, or the other party, cough up with the difference between what was originally paid and what the settlement price is.

Both parties of a "futures contract" must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. Incidentally, you can bet both ways of course, that the price will go up or down.

Now there are only three main things required to trade in gold futures. Lots of knowledge, lots of discipline and lots of cash!

A thorough knowledge of how gold futures trading works, how the gold market is faring and what it can be expected to do is absolutely essential. A thorough understanding of investment finance, some well knowledgeable and well equipt financial advisors are also advised. Also keeping up with the gold future news and gold future prices is important.

Knowing when to trade in gold futures and actually doing so can place a heavy demand on an individual. When the price of gold is plummeting, that can be the best time to buy but it takes great discipline and determination to time it right and take the plunge. It takes some discipline to sleep at nights knowing your few thousand dollars is doing some peculiar things and you are not quite sure where it will be in the morning.

Lots of cash. Although one can make vast sums of money with a relatively small outlay, it is quite possible, and at least initially, very probably, that a first time gold futures trader will lose much more than he will make. When you go to a gambling table to play Texas Hold 'em Poker, you go with a lot of cash. Here it is just the same. You go only with money you can afford to lose. If you cannot afford to lose money, don't play the game

It may be slower, it may be not quite so interesting, but the mere collection of gold coins, new and rare, and gold bullion in it's various types, is a much safer and even rewarding activity.

In the long term actually holding physical gold has, over the past 200 years, been the best way of retaining the value of one's assets, and even increasing them compared to the value of the dollar.

In short, gold futures trading is fine if you have a heap of knowledge, a cast iron discipline and oodles of money to throw away, otherwise it is safer to stick to the tried and true methods of accumulating beautiful clinking gold coins and bars!


Anonymous said...

What about taking delivery? Seems to me that you can avoid the big dealer markups by buying on COMEX and taking delivery. Has anybody done this? What are the costs involved.

goldprice said...

An article on this very subject is in
progress and will be available in a couple of days or so.

Anonymous said...

One rule of futures as stated to me by one who used them as a hedging tool was "don't buy/speculate in them if you can't afford to take delivery". Gold, oil, corn, sugar, or OJ, it's all the same in the end. I know of three wealthy men who lost all they had in the Futures market. One of them made and lost two fortunes by gambling on futures.
If you can take delivery and utilize the product having, or in the case of gold you want that asset and are comfortable with the price and are scared of worthless paper money being printed with nothing standing behind it, then it is for you.