Quick answer: Probably not. But let’s put the good qualities and cons under the microscope.
The gold market could 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). You will find gold mining and processing stocks which benefit to varying degrees from higher gold prices. And you can find other styles 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’s no physical metal. No metal also means no counterparty risk as a result of loss or counterfeiting. Think the cost will fall? It’s simple 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. That means that you only have to put on a portion 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 would only take a 5% move against your position to wipe out your whole margin. This lack of margin as a result of leverage is usually related to the unusual volatility of futures prices. Futures prices are less 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 the 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 tend to less leveraged and therefore more powerful than the tiny speculator – you. Market power can be quite a decisive factor; particularly when trading short term.
Commissions Add Up While 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 as a result of lack of storage costs could be easily lost by the necessity to continuously roll your position.
Speculation in gold futures is a very leveraged trade – no investment in gold or gold ownership. Futures are primarily designed for hedging and quick speculation. Understanding the difference can save you money.