Trading gold futures does not require gold to exchange hands. A gold future refers to an agreement by the buyer to buy a specific quantity of gold at a pre-determined price at a future time. Gold futures are the best way to gain leveraged exposure but are capricious. Gold futures are a fascinating and important territory, but they do not deserve the level of mysticism and fear they seem to create. The futures priesthood that ‘informs’ gold-stock traders often takes events out of context and disseminates half truths designed to sway sentiment.
Gold’s importance in world markets make COMEX Division gold futures and options an essential risk management tool for commercial investors. Investors watch Comex contracts as an indicator of fizz in the market. Trading gold futures securities happens mostly on paper: most of the gold bought or sold in the futures market never exchanges hands. Gold futures are typically traded by “speculators,” investors who acquire or sell gold futures but aren’t interested in the physical gold, versus “hedgers,” who do value the gold itself as an investment. Trading gold futures also has low commissions.
Gold options are also powerful and cost-effective investing instruments, that can be used to own desired quantity of gold in future, and can also be used to hedge price changes of gold that you have. Every futures contract is for 100 troy ounces.
Prices in an organized derivatives market mirror the perception of market participants about the future and lead the prices of underlying to the supposed future level. The prices of derivatives converge with prices of the underlying at the end of the derivative contract. Prices vary based on supply and demand (although the twice-daily gold fix in London helps set a reference point for prices). The price of gold in the spot gold market-called the “spot price”-is the price set for the spot gold, including delivery, to be paid two days following the date of the actual transaction.
In closing, let me emphasize again that gold futures are not a risk free financial commodity and should be considered carefully. Investments should only be made with risk resources which is capital you could afford to lose and it would not cause you to change your lifestyle in any manner.