Are You Taking A Risk With Gold Futures?

Playing the Gold Futures

A Gold futures contract is a contract for delivery of a specific amount of gold by the maturity date. Traded on the New York Mercantile Exchange (NYMEX), a standard gold contract controls 100 troy ounces of the precious metals.

Gold futures are listed under the symbol GC on the NYMEX and futures contract months are February, April, June, August, October and December. Trading hours are from 8:20AM – 1:30PM EST and the last trading day for a contract is the close of business on the 3rd to last business day in the maturing delivery month.

With the recent explosion in the gold market, investors and speculators are showing increased interest in gold futures rather than simply owning a few ounces of gold. There are two main reasons why someone would choose futures instead of simply accumulating the precious metal at the current spot price.

Hedging is the practice of buying a commodity at a fixed price so that you will know with certainty what your cost will be today. As the price of a commodity fluctuates, you do not have to worry about the change because you are locked in at a pre-determined price. It is usually large companies that depend on gold such as jewelry makers that want to protect themselves from spikes in gold prices for the raw material they need to practice their craft. It is no different from airlines hedging the price of jet fuel by buying it well in advance of when they might consume it.

Buy and Sell Gold Futures

Speculation is the other reason why people buy and sell gold futures. Because you can buy a gold futures contract on margin and only put down about 5%, you have great advantage. At $1750 per ounce, a contract is worth $175,000. You only need to put up $8,750 to control 100 troy ounces of gold. If gold goes to $1,800 in the next week, you can sell your contract and make $5,000 on your $8,750 investment in just a few days. Less than 5% of all futures contracts are held to maturity.

Just as you can make a lot of money by buying on margin when the price of the underlying commodity rises, you can just as quickly lose money if the price plummets. You can always hold your position up until maturity and hope the price recovers, but you may be required to put up more money in what is known as a margin call. Gold futures are not for everyone. They serve a valuable purpose for those that need gold for business reasons, but as a way to make big profits, they are quite risky. If you believe in gold and do not want to take big risks, stay away from gold futures and simply invest in gold coins.

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