The Gold Futures Market is another way to make money with gold. However, it is also risky and could cost you a lot of money if you don't know what you are doing.
Traditionally, the futures market was a way for farmers to guarantee a future sales price, with a ready buyer, on crops or livestock that would not be ready for market until some point in the near future. Gold mines starting selling futures contracts as well.
A futures contract traditionally lasted for 30, 60, 90 or 120 days. It was a relatively short-term instrument designed to lock-in profits before actually selling your product. Gold futures were sold in 100 ounce increments. That is, one contract guaranteed the future sales price for 100 ounces of gold.
The buyer of a gold futures contract owns the right to buy (take possession) or sell the underlying 100 ounces of gold for the time period stated in the contract. He pays a relatively small premium to the actual owner of the gold for this right.
The investor (often referred to as a “speculator”) can buy or sell the gold for a stated price during the contract period.
Most speculators never take possession of the underlying commodity. Instead, they bet that the value of gold will either go up (a call contract), or go down (a put contract). If you believe that gold will increase in value, you are “going long”. If you believe that gold is going down in value, you are “going short”
For example, lets assume I buy a “call contract” on 100 ounces of gold valued at $850 an ounce. I have the right to buy the gold from its owner for the stated time period (30,60, 90 or 120 days) at the guaranteed price of $850 per ounce.
If gold increases by $50, I can sell the “contract” and pocket the difference ($50 x 100 ounces = $500).
The reverse is also true. I can buy a “put” contract because I believe the price of gold is going down in the near future. In a “put” contract the owner of the gold, or another investor, guarantees to buy the gold at a set price. If gold goes down in value, they still have to pay the price stated in the futures contract.
For example, lets assume I buy a “put contract” on 100 ounces of gold valued at $800 per ounce. If the price drops to $700 during the contract period, the owner of the gold, or another investor, agrees to pay out the difference ($100 x 100 ounces = $1,000) to whoever owns the contract.
The contract itself can be bought or sold in the futures market to other investors. The value of the contract relies on the following:
1. How much time is left on the Contract.
2. How close to the market-price is the price in the contract
3. How many investors want to buy the contract (supply/demand)
Gold futures contracts that are at or over (under in a put contract) the market price are said to be “in the money”. “In the money” contracts are already profitable for investors and thus they are more expensive. Most speculators buy contracts that are not yet profitable, in the hopes that price changes will bring these contracts “in the money”. The CBOE (Chicago Board of Options Exchange) is the marketplace in the United States where gold futures contracts are bought and sold.
Trading gold futures contracts carries the risk of huge losses as well as profits. If the price of gold goes against your contract, you are on the hook for the difference. They should be viewed as a highly speculative investment with a huge amount of risk. Don't bet money you can't afford to lose.
Investing in Gold
Stock market investments are losing their value during these rouch economic times. Many of the world’s governments are printing money during this financial crisis to help shore up their economies. Investing in gold is a way to potentially profit from this madness.
Gold investing allows you many ways to profit. You can own the physical coins. Stock in gold miners can be owned. If you are a risk taker you can invest capital in the gold mines. But the single easiest way to get into gold investing is to own what is called an exchange traded fund. A gold ETF trades just like a stock. You can buy shares of the ETF which then invests the money in standard gold bullion.
The nice thing about ETFs is that you profit from the potential rise in gold yet you do not have to worry about storage, nor do you have to deal with selling it. Gold investing in an ETF is about the easiest way to invest in this precious metal.
Gold ETFs have no guarantee that their price will increae in value. Supply and demand dictates whether the price will go up or down. Many people believe that just because they own gold that they will instantly be rich. You should understand that gold can decrease in price as well. Of course, gold can go up in price as well.
Gold’s performance in 2008, when the stock markets were in decline, was a sturdy 5% increase. Gold “bulls” were somewhat disappointed in this performance as they figured the value of gold to be much higher given teh state of the world economy. Many analysts believe that the price of gold could very well go over $2,000 an ounce over the next few years.
If you believe that inflation will rise and that the economies around the world will continue to decline then gold may very well be a good safe haven to protect your investments. Investing in gold is wise for portfolio diversification. If the stock market for beginners poses too many challenges then a simple investment in a gold ETF might be a good place to deploy your cash until the market turmoil subsides.
Gold investing allows you many ways to profit. You can own the physical coins. Stock in gold miners can be owned. If you are a risk taker you can invest capital in the gold mines. But the single easiest way to get into gold investing is to own what is called an exchange traded fund. A gold ETF trades just like a stock. You can buy shares of the ETF which then invests the money in standard gold bullion.
The nice thing about ETFs is that you profit from the potential rise in gold yet you do not have to worry about storage, nor do you have to deal with selling it. Gold investing in an ETF is about the easiest way to invest in this precious metal.
Gold ETFs have no guarantee that their price will increae in value. Supply and demand dictates whether the price will go up or down. Many people believe that just because they own gold that they will instantly be rich. You should understand that gold can decrease in price as well. Of course, gold can go up in price as well.
Gold’s performance in 2008, when the stock markets were in decline, was a sturdy 5% increase. Gold “bulls” were somewhat disappointed in this performance as they figured the value of gold to be much higher given teh state of the world economy. Many analysts believe that the price of gold could very well go over $2,000 an ounce over the next few years.
If you believe that inflation will rise and that the economies around the world will continue to decline then gold may very well be a good safe haven to protect your investments. Investing in gold is wise for portfolio diversification. If the stock market for beginners poses too many challenges then a simple investment in a gold ETF might be a good place to deploy your cash until the market turmoil subsides.
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