Gold futures investing. You’ve heard of it, but what does it mean? Investors use a futures strategy for commodities. While we often think of oil as a commodity, all types of precious metals, including gold, can fall into that category, as well.
So gold futures investing, or any futures investing, involves a contract between the buyer and the seller. The buyer agrees to buy gold from the seller on a future date at an agreed-upon price. Gold futures were first made available on the COMEX out of New York in 1974. Since then, the interest in gold has grown, and futures trading of this precious metal has become one of the primary strategies.
Is gold futures investing right for your portfolio? Dabbling in futures is not for every investor, but it can pay off for those who can avoid the unique risks associated with this type of investing.
The benefits behind gold futures investing
There are some advantages to futures investing, which are primarily geared towards investors who target returns through speculation.
An investor who opts into a futures contract is positioning themselves for an increase in the value of stocks. If the market ends up moving in the right direction, then the investment can be worth significantly more than the initial amount paid.
Investors also like the liquidity associated with futures investing. There are always buyers and sellers in the futures market. There are also futures markets with extended trading periods, so buying and selling can occur when other markets are closed. There are even futures markets that trade 24 hours per day, seven days a week. A high level of liquidity also allows investors to place futures contracts faster than they can with other investments. And believe it or not, there is some amount of price stability. Prices on futures contracts do not fluctuate as much as some penny stocks or other volatile assets.
Fees associated with futures can be lower as well, because commissions are only charged when the contract ends. If an investor uses an online trading service, the commission may only be a handful of dollars. Using a broker will be more expensive depending on the actual services rendered, but these expenses are still less than they may be with other investments.
Futures can offer investors diversification within a portfolio and provide a hedge against risk in certain areas. This is especially the case with interest rates, currency rates, and commodity prices. For instance, gold futures investing helps make the gold market more efficient by avoiding the insider trading that can happen in other parts of the market.
Finally, there are some areas of investing where professionals or insiders have a hand over the competition due to internal knowledge or direct experience. That is not the case with futures investing. Success with futures investing relies on predicting how the market will move in relation to the investment.
Realize that gold futures investing is not for everybody
Investors focusing on speculation buy gold futures when they believe the price of gold will go up. These same investors will sell gold futures when they predict that the price of gold will go down.
As previously mentioned, gold futures rely heavily on speculation. You can make speculative guesses based on certain information, but overall, predictions are a big part of it. Some investors with a conservative approach prefer to avoid this kind of speculation and prefer to invest in gold through other means. Some of these investments include gold mining companies that may already have a history of success, stock price increase, and even dividends. Investing in top gold mining companies can ultimately be more impactful in a portfolio than making guesses on how the gold market will move over time.
Do you currently invest in gold? In what ways do you prefer to buy gold as an investment?