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Derivatives Investment

Gold Futures / Mini Gold Futures

Investment in gold can be done through several channels. For example, ETFs are primarily traded on the stock exchange, while gold forward contracts are primarily traded on the OTC market. And gold futures contracts and gold options are primarily traded on the derivatives market.

Gold Futures is a contract that parties enter into to either buy or sell gold in the future. The parties must adhere to terms of the Gold Futures contract. When entering into a Gold Futures contract the prices for buying and selling are fixed in order to deliver the gold or to make cash a settlement in the future. On the date when both parties enter into the Gold Futures contract they will agree on the prices for buying and selling in the future, but there will be no settlement on that date. The delivery and settlement of the price for the gold will be done in the future when contract's maturity date arrives.

Advantages of Gold Futures Trading
  • Speculating and short selling possibilities
  • If you believe that the price of gold will rise, you can make a profit by taking a long position in the Gold Futures market. If you believe the price of gold will fall, you can make a profit by taking a short position in the Gold Futures market.

  • Hedging
  • If you own “real” gold and believe that the price of gold has risen too sharply over the past few weeks, and if you expect the price to fall back, you can benefit from Gold Futures trading as a hedging tool. Conversely, by holding a short position in Gold Futures you can still make a profit even if you hold a portfolio of “real” gold at a loss.

Risk of Gold Futures Trading
  • Monitor your portfolio
  • Investment in Gold Futures contracts is money placed as margin only, and the amount invested is far less than value of underlying assets. If investors make a profit, on a mark-to-market basis the margin will increase. Conversely, if investors make loss on a mark-to-market basis the margin will be reduced. If the margin level is reduced to a maintenance margin, investors will be required (i.e. a call margin) to add margin money until it reaches the level of initial margin. Therefore, investors should monitor their position and margin closely.

  • A limited lifespan
  • Gold Futures contracts have a limited lifespan. Investors should take note of the maturity date.

  • Market Risk
  • The global gold market is open 24-hours per day, but the TFEX market is open for only 7-8 hours. Therefore, investors in Gold Futures contracts are exposed to price risk for the period of time that the TFEX market is closed.

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