Quick answer: Probably not. But let’s put the good qualities and cons under the microscope.
The gold market can be played in several ways. You can buy gold bullion bars or coins. You can 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 type of paper ownership. Gold futures offer some distinct advantages for certain 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 easy to go short and profit if the cost drops. Compared to physical metals, futures trading can be a quick and easy proposition.
But futures markets also have some serious disadvantages.
Leverage Futures are highly leveraged. That means that you merely have to put on 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’d only take a 5% move against your position to wipe out your entire margin. This loss of margin as a result of leverage is often attributed to the unusual volatility of futures prices. Futures costs 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 worth of the holdings by going short in the futures markets. These hedgers and producers of gold tend to be the more expensive players in the futures markets – and they tend to less leveraged and therefore stronger than the tiny speculator – you. Market power can be a decisive factor; especially when trading short term.
Commissions Add Up As you can avoid certain fees by not dealing in physical gold, you can find commissions and fees necessary to clear futures trades. Because futures contracts typically expire every couple of months, they should be rolled regularly- thus incurring more commission expense. Any savings as a result of not enough storage costs can be easily lost by the requirement to continuously roll your position.
Speculation in gold futures is a highly 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.