Quick answer: Probably not. But let’s put the good qualities and cons under the microscope.
The gold market could be played in numerous ways. You should buy gold bullion bars or coins. You should buy shares in gold funds – including exchange-traded funds (ETFs). There are gold mining and processing stocks which benefit to varying degrees from higher gold prices. And there are 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 is no physical metal. No metal also means no counterparty risk as a result of loss or counterfeiting. Think the purchase price will fall? It’s easy to go short and profit if the purchase price drops. Compared to physical metals, futures trading could be a quick and easy proposition.
But futures markets also include some serious disadvantages.
Leverage Futures are highly leveraged. That means that you simply have to put on 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 would only take a 5% move against your position to eliminate your entire margin. This loss in margin as a result of leverage is frequently attributed to the unusual volatility of futures prices. Futures prices are not more volatile – oahu is 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 value of the holdings by going short in the futures markets. These hedgers and producers of gold are generally the more expensive players in the futures markets – and they often less leveraged and therefore stronger than the small speculator – you. Market power could be a decisive factor; especially when trading short term.
Commissions Add Up While you can avoid certain fees by not dealing in physical gold, there are commissions and fees necessary to clear futures trades. Because futures contracts typically expire every couple of months, they have to 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 – no investment in gold or gold ownership. Futures are primarily designed for hedging and quick speculation. Understanding the difference will save you money.