Gold Futures markets explained for the next Gold bull market and increase margins.
If you are interested in owning or trading gold, then you may have heard of the term gold futures. For most retail investors, gold futures may seem like an unfamiliar concept. Allegiance Gold can educate on the terminology associated with gold, gold IRA, precious metal investing, and gold futures. Here, we will take a look at what gold futures are, how they work, and how they could be a good idea for your investment portfolio.
What Are Gold Futures?
Gold futures is an agreement to purchase gold at a certain price at a certain time. This is known as a gold futures contract. Another component of a gold futures contract is that the physical gold must be delivered to the contract holder at contract expiration if the contract is “in the money.”
Let’s say an investor purchases a futures contract for 100 ounces of gold that is scheduled to expire in three months at a price of $2,000. If the investor holds the future contract to the date of expiration, then the investor must pay the other party $200,000 while the other party delivers 100 ounces of gold bullion.
In the vast majority of cases, investors will simply use futures contracts as a way to speculate on the price of gold using leverage. Because a futures contract can be purchased for a fraction of the price of its contract value, a future contract acts as a leveraged play on the price of gold.
Gold Futures and Margin
Since the average gold futures contract trades with a 100 to 1 leverage, the futures investor will be required to put up a margin when purchasing a futures contract. For instance, if a gold futures investor purchases one gold futures contract, then he may be obligated to put up 10% of the contract’s value as a margin. Therefore, if a gold futures contract is worth $1,700, the futures trader may be required to put up $17,000 or 10% of the contract’s value. However, that means that if the contract’s value falls by 10%, then the investor’s margin will be wiped out.
The Dangers Of Gold Futures Trading
Because of the leveraged nature of gold futures trading, this type of derivative is not recommended for long-term gold investors. In fact, gold futures trading is not even a good idea for retail gold traders. A better alternative for gold traders is to use gold exchange-traded funds or ETFs.
A Better Way To Invest In Gold
If you are looking to invest in gold, then you should steer clear of any trading strategy that investors leverage or contracts with an expiration. That’s because gold is designed to preserve wealth over the long term. Therefore, you should consider an investment in physical gold. With physical gold, you own the precious metal either as gold coins or gold bullion. Here’s a look at the advantages of owning physical gold:
1). You Own The Precious Metal Outright
Unlike gold futures contracts, gold ETFs, gold mining stocks, gold coins, and gold bullion allow you to truly own your gold. There is no third-party risk and there is no one standing between you and your investment.
2). You Can Easily Sell It Anywhere
Gold really shines when it comes to financial crisis situations. Therefore, you can be sure that you can easily find a seller for your gold if the worst-case scenario happens to the financial world. Just about any pawn shop or gold dealer will pay you cash for your gold. Also, you can easily sell your gold to an interested private party.
3). Owning Gold Allows You A Private Store Of Wealth
The vast majority of wealth is held in a bank, brokerage account, or real estate. When you own physical gold, you are able to conceal your wealth. This may become important in certain situations.
Discovering The Best Way To Own Gold
While gold futures may be an interesting way to speculate on the short-term price of gold using margin, it may not be best for the average retail investor. If you are looking for the best way to own gold, then consider owning gold coins and gold bullion in your physical possession. The best way to become more educated on all investment options that are gold-related, speak to an executive at Allegiance Gold today. They will be able to send you a FREE gold IRA guide that displays the importance of diversifying a financial portfolio into a gold IRA and other gold options. Call (844) 790-9191 today for more information!