Let the Gold
Spin Money for you---learn about
Gold Futures TradingBy: Madhubanti Rudra
There are pockets in the developing
world, where gold is still preferred
as the safest tool of savings and
investment.
Both in the developing world and in
the developed ones, the gold is
treated as an asset class in itself.
But in the backward economies, you
have to trade in gold physically to
take advantage from its price
volatility.
 Contrastingly
in the developed nations, where
commodity futures market have
flourished for years, you don't have
to buy or sell gold from physical
market to cut profit out of it. Here
hoarding gold is replaced by trading
in gold future.
Let's explain the difference between
physical trading of gold and the
concept of futures trading with the
example below.
Suppose the current gold
price is $1000 per ounce and you
have $100,000 for investment at
your disposal. This much money
will allow you to buy 100 ounce
of gold. Now say after
three months when the price of
gold touches $1100 per ounce,
you decide to sell it off to
make a cool profit of $100 per
ounce and hence $10,000 for your
total holding over three months
time.
Now let's see what happens in the
futures market with the same amount
of gold and the similar assumption
regarding the rise in the gold
price. In majority gold exchanges of
the world, futures contracts till
four months are allowed. Let's
assume that market remains stable
over the next three-month.
Now when you are trading in gold
futures, you don't have an
obligation to buy or sell a specific
quantity of the metal and cough up
the entire price. Trading futures of
any commodity means taking delivery
of the underlying commodity at a
given date in the future. For the
seasoned investors, this is referred
to as taking a long position.
To trade in gold futures, one needs
to have a trading account which
involves keeping a deposit. The
amount of deposit varies with the
exchanges all over the world. This
is the margin money, which is
required by the exchange. The
traders have to buy a minimum volume
of the gold as futures contract.
Suppose the minimum volume is 100
ounce.
For the minimum amount of futures
contract your initial investment is:
the margin money which usually
doesn't exceed 10% of the
investment, plus the brokerage
charge which usually doesn't exceed
.25%. That means the investment for
minimum volume of gold will cost you
roughly $115.
Now gold market is one of the most
liquid market and that make the
futures price always touch the price
of the underlying. Thus with 100,000
bucks in your pocket, you will be
able to enter into the contract for
almost 800 ounces of gold which is 8
times more than the physical market.
Due to this market dynamics, one can
buy minimum volumes of gold for many
times cheaper than it actually costs
in the physical market and naturally
with the same amount of investment,
one will command many times more
volumes of gold than he can do in
the physical market.
With the same dynamics, at the end
of three months, by selling 800
ounces of gold one can make a gross
profit that is again many times more
the profit made in physically gold
market.
So you see how your gold can spin
money for you and this is true for a
bullish as well as a bearish market.
Sounds to hot to resist? But don't
burn your hands before training
yourself in the basics of gold
futures trading--- the whole affair
has its downsides as well and you
have to learn how to guard these
risk factors. In any case, you have
to make sure your delivery entails
gold certification and accreditation
by the assayer of the exchange.
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