Gold futures are contracts to buy or sell gold at a future date, used by producers to hedge against market fluctuations and by speculators to make money. Margin trading allows for large gains, but also risks large losses. The gold futures market is heavily invested but can be risky.
The gold futures market is one of several commodity futures, in which contracts are entered into, agreeing to buy or sell gold at a specified price at a future date. Gold futures are used as a way for gold producers and movers to hedge their products against drastic market fluctuations, and as a way for speculators to make money from those same market movements.
The gold futures market is one of the most heavily invested markets in the world, often acting as a market people turn to when the broader market is suffering. The gold futures market is very attractive to investors, in part because margin trading allows relatively small movements in the gold market to translate into large financial gains.
By investing in gold futures, you are essentially promising someone that you will buy or sell a certain amount of gold on a settlement date in the future. For example, an investor is quite convinced that the price of gold will increase in the next three months. If you wanted to cash in on that simply by buying and selling gold, and you had $1,000 US dollars (USD) to invest, you would buy $1,000 worth of gold at $500 an ounce for a total of two ounces. If, in three months, it had gone up to $800 per ounce, you would have made a profit of $600; It’s not a bad win, but it’s not terribly impressive either.
However, by buying gold futures on margin, you can take advantage of the money you have to invest heavily. Depending on the state of the market and the size of your purchase, the amount of money you have to put on margin ranges from 2% to 20% of the total amount you want to buy. In an average market, your margin on gold futures will probably be around 5%, so the same $1,000 can be used to buy gold futures for $20,000 worth of gold, or 40 ounces at $500 per ounce. If the price of gold increases by the same amount, to $800 USD per ounce, you will have made a profit of $12,000 USD, even though you only had $1,000 USD to invest.
On the other hand, it is much easier to lose money quickly when trading gold futures on margin than when buying them with cash in hand. If those same 40 ounces lose just 5% of their value, down to $475 USD per ounce, then all of the initial investment of $1,000 USD will be gone. Periodically, margins will need to be topped up as the price declines to the point where you almost spend all of your initial investment. If the investor cannot complete his margin, the account is closed and the investor loses all of his money. The temptation of gold futures is huge, due to the huge amounts of money to be made if played correctly, but most people who trade gold on margin end up losing their investments.
Smart Asset.
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