Quick answer: Probably not. But let’s put the professionals and cons under the microscope.
The gold market can be played in numerous ways. You should buy gold bullion bars or coins. You should 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 designs of “paper” ownership of gold.
A commodity futures contract is one type of paper ownership. Gold futures offer some distinct advantages for certain 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 due to loss or counterfeiting. Think the cost will fall? It’s easy to go short and profit if the cost drops. In comparison to physical metals, futures trading can be quite a quick and easy proposition.
But futures markets also include some serious disadvantages.
Leverage Futures are highly leveraged. Which means that you only have to put on a fraction 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’d only take a 5% move against your position to get rid of your entire margin. This loss of margin due to leverage is usually related to the unusual volatility of futures prices. Futures costs are not 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 worthiness of their holdings by going short in the futures markets. These hedgers and producers of gold are generally the more expensive players in the futures markets – and they have a tendency to less leveraged and therefore more powerful than the little speculator – you. Market power can be quite a decisive factor; especially when trading short term.
Commissions Add Up When you can avoid certain fees by not dealing in physical gold, you can find commissions and fees required to clear futures trades. Because futures contracts typically expire every a short while, they need to be rolled regularly- thus incurring more commission expense. Any savings due to insufficient storage costs can be easily lost by the need to continuously roll your position.
Speculation in gold futures is a very leveraged trade – not an investment in gold or gold ownership. Futures are primarily created for hedging and quick speculation. Understanding the difference can help you save money.