Gold Futures and Options

Because of its unique qualities and shining beauty, gold has been a very appealing investment vehicle for quite some time. The wealth of a particular country is estimated by the amount of its gold reserve, while many individuals invest in gold, shielding their wealth against the financial uncertainty which has been reigning for a few years now. This article discusses some ways to use gold futures and options as an insurance against the financial instability of the global market.

Gold Futures

Gold futures contracts were first traded in the USA in 1974. The time frame coincides with the lifting of the ban on gold ownership by American citizens. Nowadays, gold option contracts are available at the Tokyo Commodity Exchange and the New York Stock Exchange. On NYSE, the prices of gold options are quoted in US cents and dollars per ounce. Gold options are traded in yens per gram on TOCOM. The price of gold futures is determined by supply and demand, as well as by the impact of economic and political events.

Futures and options may be used as an alternative to the more traditional ways to invest in gold. These are buying physical gold in the form of coins or bullions or purchasing stocks of mining companies. Private investors typically use gold futures as means to diversify their portfolios. However, these investment vehicles may be used by gold producers and companies that use gold for industrial purposes, so as to minimize their price risk.

A gold futures contract is a legally binding agreement for the delivery of gold at some time in the future at a preliminarily agreed price. Gold options give the right to purchase or sell a specified quantity of gold on a certain day and at a fixed price. In this way, gold doesn’t change hands as in the case of physical gold. One advantage of such gold trading is that your startup expenses won’t be considerable. Keep in mind, however, that when you purchase gold futures, you also cover the costs of the whole purchase, plus the margin that the seller of the gold puts into his account.

If you have decided to put your money in gold futures, you have to be ready to deal with a financial phenomenon that is known as “rolling over” – when the contract’s expiration date comes, investors who want to keep the position open need to re-contract (roll over). For this reason, you will be constantly forced to spend money on extending your gold futures contract.

When gold futures are traded, most brokers calculate the costs for dealing as a percentage of the principal, but this could be rather deceptive – if the principal has not been settled, the costs of settlement cannot be calculated. So, the investor cannot figure out his or her real expenses. To get the real picture, you need to ask the broker to calculate settlement costs as a percentage of the margin, instead.

Many gold futures brokers are coaxing their clients with a seemingly agreeable stop-gap expedient called “stop-loss”. As it is suggested by its name, this tool is meant to limit the financial losses for gold futures investors when their position on the market is deteriorating. Unfortunately, the stop loss tool can incur many small and unnecessary losses to the investor while protecting him from the big ones. These losses may prove even more harmful in the long run.

Gold Futures and Options

Finally, for all their great leverage options, gold futures are not for everyone. They have many hidden costs and underlying risks, not to mention their extreme market volatility.

Both Gold Futures and Gold Options offer high level of leverage to investors, but with the increased leverage comes increased level of risk. Gold Futures and Gold Options are not for the average investor in general.

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