Quick answer: Probably not. But let’s put the professionals and cons underneath the microscope.
The gold market may be played in a number of ways. You can buy gold bullion bars or coins. You can 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 you can find other types of “paper” ownership of gold.
A commodity futures contract is one form 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 entails no counterparty risk as a result of loss or counterfeiting. Think the price will fall? It’s simple to go short and profit if the price drops. In comparison to physical metals, futures trading can be quite a quick and easy proposition.
But futures markets also have some serious disadvantages.
Leverage Futures are highly leveraged. That means that you simply have to put up a portion of a contract’s value – the margin – to “own” it. Currently, you are able to control 100 ounces of gold, worth about $140,000, with only $6700 cash. But it would just take a 5% move against your position to wipe out your complete margin. This loss in margin as a result of leverage is usually related to the unusual volatility of futures prices. Futures prices are no 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 value of these 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 tend to less leveraged and therefore more powerful than the small speculator – you. Market power can be quite a decisive factor; especially when trading short term.
Commissions Add Up As you can avoid certain fees by not dealing in physical gold, you can find commissions and fees necessary to clear futures trades. Because futures contracts typically expire every month or two, they should be rolled regularly- thus incurring more commission expense. Any savings as a result of lack of storage costs may be easily lost by the necessity to continuously roll your position.
Speculation in gold futures is a highly leveraged trade – not an investment in gold or gold ownership. Futures are primarily designed for hedging and quick speculation. Understanding the difference can save you money.