Gold has been a popular choice for investors for years, largely due to its high returns and long term stability. However, recently there has been a surge in interest in gold for two main reasons. First, the price of gold is increasing as more investors realize the inherent value of gold as a hedge against inflation. Second, gold is becoming increasingly popular as a safe haven investment as the world’s economies grow further apart. Gold offers a classic hedge against inflation and a well-established store of value in an unstable economic climate. Alternatively, you can invest in gold futures to speculate on movements in the price of gold relative to other precious metals like the U.S. Dollar or other currencies.
What is a Gold Future?
Gold futures are an agreement in which one party promises to buy or sell a specific amount of gold at a fixed rate on or before a certain date in the future. As the price of gold increases so does the premium that can be paid to buy the gold contract. In most cases, buyers of gold futures will pay both the premium and the cash margin, which is the return of investment minus the price of gold sold.
Traditional Exchanges? Nope.
Unlike most gold derivatives and gold coins, gold futures contracts are not traded on traditional exchanges but on over-the-counter swap agreements unlike gold ETFs. This means that unlike stock or forex trading, there is no physical gold in actuality to be purchased or sold. Instead, a buyer of gold futures trades contracts that contain gold futures contracts and calls for the right to buy or sell gold per contract at any time during the agreed trading period.
Like stock or forex trading, gold futures exchanges allow a contract buyer to take delivery of a particular quantity of gold on a particular date. Unlike stock or forex trading, in which you are not required to deliver the underlying instrument when you enter into a gold futures contract, gold futures contracts require you to deliver physical gold. If you do not deliver, then you lose your gold investment. On the other hand, if you deliver, then you are rewarded with a profit, known as a margin, by the contract buyer.
Increase Portfolio Diversity
Most investors use futures contracts to increase their portfolio risk and make more money. For instance, some investors use gold as a hedge against turbulence in financial markets. Gold is used as a buffer against fluctuations in equities due to political events or natural disasters. In addition, some investors use gold as a hedge against inflation or asset price bubbles. In all these cases, gold is used as a protective asset.
Who Can Buy Gold Futures?
Gold futures contracts are not open to everyone; instead, they are held either by individual investors or large financial institutions. The price of gold is highly sensitive to changes in global stock markets and the state of the American economy. Therefore, if an investor chooses to buy gold futures contract, he is required to have physical possession of gold. If the investor does not have physical possession, then he is required to open an account with an authorized gold futures contract buyer. To protect his interests, most financial institutions employ margin requirements, which is a percentage of the total amount of gold that is ordered for sale.