Gold Futures

If you are somehow related to gold trading, you might have come across a term called Gold Futures. What is Gold Futures?

A future is simple deal in gold funds, decided in the present time, but the actual exchange takes place on a day in future. Both parties (i. e. the buyer and the seller) are benefited due to Futures, because neither the buyer has to pay full price at present, nor the seller has to handover the fixed amount of gold. The working of Gold Futures may seem to be complicated, yet it is an interesting process.

The buyer, upon the decision of the deal, has to pay a part of the total payment. This is called Margin. It is usually 5-20%. Margin is needed to protect the parties from running away, in any way the price of Gold increases or falls down. Sometimes, the margin may top up. This is because, when the price of gold falls, the buyer has to pay more margin. This will be explained with the example described below.

Futures provide leverages. This is also known as gearing. In order to understand leverage and topping up of margin, see the example below.

For example, you have $10 000 with you. If you, simply buy gold bullion, you can buy gold bullion worth of $10 000 only. So, when the price of gold increases by 10%, you will get a profit of $1000. But, if you buy gold through gold futures, you can buy Gold bullion, worth of nearly $200 000. Because you will only have to pay 5% of the total amount at present, that is only $10 000. Now, if the price of gold increases by 10%, you will earn a profit of $20 000. This is 20 times greater than the profit you will gain by buying gold bullion at present. Now, you can understand, how gold futures provide leverage.

You also need to notice the flip side to this situation. If somehow, after the deal has been decided, gold prices fall, you will have to pay more margin. For example, the gold prices fall by 10%. In the case of buying simple bullion, you will only have a loss of $1000 and 90% of your investment is still with you. But, when you  buy gold futures, you will have to suffer a loss of $20 000. This will make you pay more margin over the actual one.

Gold Futures can bring you a lot more profit than simple gold trading with a risk of a heavy loss. Therefore, whenever you decide to buy gold futures, act smartly, and study the market trends and future expectations, carefully.