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Gold Futures Trading:The Fundamentals
Trading gold futures does not involve gold to exchange hands. A gold future represents an agreement by the buyer to buy a specific quantity of gold at a pre-determined price in a future time. Gold futures are the best way to obtain leveraged exposure however they are capricious. Gold futures are a fascinating and important realm, but they do not deserve the level of mysticism and dread they seem to generate. The futures priesthood that 'informs' gold-stock traders frequently takes events beyond context and also disseminates half-truths planned to sway sentiment.
Gold's importance in global markets makes COMEX Division gold futures and options an important risk management tool for commercial traders. Traders watch Comex contracts as an indicator of froth in the market. Trading gold futures securities happens largely on paper: the majority of the gold purchased or sold in the futures market never moves. Gold futures are normally traded by "speculators," investors who purchase or sell gold futures but aren't interested in the actual gold, versus "hedgers," who do value the gold by itself as an asset. Trading gold futures also has low fees.
Gold options are also powerful and cost-effective investing tools, which can be used to own desired quantity of gold in future, and could also be used to hedge price changes of gold that you possess. Every futures contract is equivalent to 100 troy ounces.
Prices in a structured derivatives market reflect the assumption of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with prices of the underlying at the expiration of the derivative contract. Prices vary based on supply and demand (although the twice-daily gold fix in London aids set a reference point for prices). The price of gold in the spot gold market-known as the "spot price"-is the price fixed for the spot gold, including delivery, to be paid two days after the date of the actual transaction.
In closing, let me stress again that gold futures are not a risk free financial commodity and should be considered judiciously. Investments should only be made with risk assets which is funds you could afford to lose and it would not cause you to change your standard of living in any way.
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