Quick answer: Probably not. But let’s put the pros and cons underneath the microscope.
The gold market could be played in numerous ways. You can buy gold bullion bars or coins. You can buy 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 designs of “paper” ownership of gold.
A commodity futures contract is one kind 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 as a result 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 quite a quick and easy proposition.
But futures markets also come with some serious disadvantages.
Leverage Futures are highly leveraged. Meaning that you only have to hold a portion of a contract’s value – the margin – to “own” it. Currently, you can control 100 ounces of gold, worth about $140,000, with only $6700 cash. But it’d just take a 5% move against your position to wipe out your whole margin. This loss in margin as a result of leverage is usually attributed to the unusual volatility of futures prices. Futures costs are not more volatile – it’s 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 worth of their holdings by going short in the futures markets. These hedgers and producers of gold tend to be the larger players in the futures markets – and they have a tendency to less leveraged and therefore stronger than the small speculator – you. Market power can be quite a decisive factor; particularly 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 a short while, they should be rolled regularly- thus incurring more commission expense. Any savings as a result of not enough storage costs could be easily lost by the need 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 will save you money.