Quick answer: Probably not. But let’s put the good qualities and cons beneath the microscope.
The gold market can be played in several ways. You should buy gold bullion bars or coins. You should buy shares in gold funds – including exchange-traded funds (ETFs). You will find gold mining and processing stocks which benefit to varying degrees from higher gold prices. And you will find other designs of “paper” ownership of gold.
A commodity futures contract is one kind of paper ownership. Gold futures offer some distinct advantages for many traders. Storage investing, insurance and transportation of the physical metal don’t drive up costs – because normally there is no physical metal. No metal also means no counterparty risk due to loss or counterfeiting. Think the purchase price will fall? It’s easy to go short and profit if the purchase price drops. In comparison to physical metals, futures trading can be quite a quick and easy proposition.
But futures markets also come with some serious disadvantages.
Leverage Futures are highly leveraged. Which means that you simply have to put up a fraction of a contract’s value – the margin – to “own” it. Currently, you can control 100 ounces of gold, worth about $140,000, with only $6700 cash. But it would just take a 5% move against your position to eliminate your complete margin. This loss in margin due to leverage is frequently caused by the unusual volatility of futures prices. Futures costs are no 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 these holdings by going short in the futures markets. These hedgers and producers of gold tend to be the larger 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 While you can avoid certain fees by not dealing in physical gold, you will find commissions and fees required to clear futures trades. Because futures contracts typically expire every month or two, they must 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 – no investment in gold or gold ownership. Futures are primarily created for hedging and quick speculation. Understanding the difference can help you save money.