Advantages Of Investing In Gold Futures
Some of the major advantages of Gold Futures are mentioned below.
- It eliminates the need for immediate storage, as a buyer will not have to worry about finding secure storage facilities to store the gold.
- Participating in this trade involves lower amounts, as a buyer can pay a certain amount at the time of making a deal and the remaining on signing the agreement.
- There is considerable liquidity on offer.
- There is a provision to short sell.
Advantages Of Futures Contracts
Trading futures contracts offers more financial leverage, flexibility, and financial integrity than trading the commodities themselves because they trade at centralized exchanges.
Financial leverage is the ability to trade and manage a high product with a fraction of the total value. Trading futures contracts is done with a performance , which requires considerably less capital than the physical market. The leverage provides speculators with a higher risk/higher return investment profile.
For example, one futures contract for gold controls 100 troy ounces, or one brick of gold. The dollar value of this contract is 100 times the for one ounce of gold. If the market is trading at $600 per ounce, the value of the contract is $60,000 . Based on exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control $60,000 worth of gold. As an investor, this gives you the ability to leverage $1 to control roughly $15.
In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations.
If I Buy A Gold Futures Contract Do I Own Gold
This is kind of a tricky question to answer. When purchasing a gold futures contract, you can take delivery on that contract of the physical gold. This process can be lengthy and somewhat complicated, however. One does not have the physical gold in their possession until they take delivery and even then the gold will likely be held in a depository until it is transferred to the location of their choice. Most futures contracts are never delivered upon, and gold and silver are no exception. When looking to buy physical gold, there are easier ways to purchase physical metal.
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Writing Puts To Purchase Stocks
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount….
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow….
Gold Options & Futures
How Do We Get Gold
Although panning for gold was a common practice during the California Gold Rush, nowadays it is mined from the ground. While gold can be found by itself, it’s far more commonly found along with other metals, including silver and copper. Thus, a miner may actually produce gold as a by-product of its other mining efforts.
Miners begin by finding a place where they believe gold is located in large enough quantities that it can be economically obtained. Then local governments and agencies have to grant the company permission to build and operate a mine. Developing a mine is a dangerous, expensive, and time-consuming process with little to no economic return until the mine is finally operational — which often takes a decade or more from start to finish.
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Why Bother With Gold Futures Instead Of Gold
In the above-mentioned examples it seems that it might be easier to simply buy gold if you believe the price is going up or sell it in the case that you expect it to go down.. Why buy/sell a futures contracts? This is pretty simple. When you buy a futures contract to buy gold, you ill not actually receive physical gold on the delivery date. Neither will the other party pay the full amount of money. In reality, the two parties settle by paying/receiving the difference between the initial price and the price on the delivery date .
For instance, the buyer acquires a futures contract to buy gold, the amount of the contract is $10 000 and the agreed upon price of the gold is $1000. Lets assume that he was right, the price on the delivery date turns out to be $1050. In that case, the buyer receives $10 000 * = $1 000. On the other hand, if the trade didnt go as anticipated and the price goes down and turns out to be $900, than the buyer needs to pay $10 000 * = $1 000, or a $1000 loss.
What is important here is that the buyer is not expected to pay the full amount of money on the agreement. He needs to pay only a small part of the value of the contract as a security deposit . This allows the buyer to speculate with the amount of money he do not actually possess. This is the speculative advantage of futures.
Gold & Silver Futures Contracts
Gold and silver futures are traded on several exchanges across the globe. These instruments can give investors exposure to gold and silver while only putting up a fraction of the total cost of the contract. Because of this leverage, gold and silver futures are not to be taken lightly and are certainly not appropriate for all investors.
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Why Is Gold Valuable
In ancient times, gold’s malleability and luster led to its use in jewelry and early coins. It was also hard to dig gold out of the ground — and the more difficult something is to obtain, the higher it is valued.
Over time, humans began using the precious metal as a way to facilitate trade and accumulate and store wealth. In fact, early paper currencies were generally backed by gold, with every printed bill corresponding to an amount of gold held in a vault somewhere for which it could, technically, be exchanged . This approach to paper money lasted well into the 20th century. Nowadays, modern currencies are largely fiat currencies, so the link between gold and paper money has long been broken. However, people still love the yellow metal.
Streaming And Royalty Companies
For most investors, buying stock in a streaming and royalty company is probably the best all-around option for investing in gold. These companies provide miners with cash up front for the right to buy gold and other metals from specific mines at reduced rates in the future. They are like specialty finance companies that get paid in gold, allowing them to avoid many of the headaches and risks associated with running a mine.
Benefits of such companies includes widely diversified portfolios, contractually built-in low prices that lead to wide in good years and bad, and exposure to gold price changes . That said, none of the major streaming companies has a pure gold portfolio, with silver the most common added exposure. So you’ll need to do a little homework to fully understand what commodity exposures you’ll get from your investment. And while streaming companies avoid many of the risks of running a mine, they don’t completely sidestep them: If a mine isn’t producing any gold, there’s nothing for a streaming company to buy.
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Gold Mining Stocks And Funds
Gold mining stocks and funds are just what they sound like they are stocks of companies that mine for gold, or funds that include stocks of companies that mine for gold. This isnt so much an investment in gold as an investment in the operations that are looking for gold, and it comes with risks, like any investment.
Gold mining stocks tend to be riskier investments that dont correlate perfectly with gold prices, Wittmeyer said. Mining companies have operational risk, regulatory risk, environmental risk and corporate governance risk, and frankly are not the best mechanism for investors who only want to gain exposure to gold prices.
The price of gold could be going up $1,000, for instance, but if a gold mining company has taken on a foolish amount of debt and a chief executive commits an infraction that results in the company getting sued, that stock could quickly take a dive.
- Take advantage of rising gold prices: If the price of gold goes up but a companys costs to mine stay the same, you stand to make money as stock prices rise.
How to buy gold mining stocks and funds:
Gold mining stocks and funds can be bought and sold through a brokerage account. Large gold mining companies include Newmont Goldcorp, Barrick Gold and AngloGold Ashanti. Some of the biggest gold miners ETFs include VanEck Vectors Gold Miners ETF , Direxion Daily Gold Miners Bull 2X Shares and iShares MSCI Global Gold Miners ETF .
Open Your First Trade
There are a variety of gold markets you can trade with us, including our proprietary spot prices, futures contracts and options. Alternatively, you could get indirect exposure to gold via company stocks and ETFs.
Whichever gold market you decide to trade, its important to think about whether youll go long or short, what position size youll take and how you will manage your risk. We offer a range of solutions for risk management, including stop-losses and limit-close orders these are used to close trades at predetermined levels of loss and profit respectively.
- Spot gold
To get indirect exposure to gold, you could take a position on companies within the gold supply chain, or ETFs some track the underlying gold price, while others follow a group of gold company shares.
You trade on the underlying price of gold stocks and ETFs with CFDs. As you wouldnt take ownership of the underlying shares, you can go long or short.
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Why Investors Like Gold
Gold has a proven track record for returns, liquidity, and low correlations, making it a highly effective diversifier, says Juan Carlos Artigas, director of investment research at the World Gold Council.
These qualities are especially important for investors:
- Returns: Gold has outperformed stocks and bonds over certain stretches, though it doesnt always beat them.
- Liquidity: If youre buying certain kinds of gold-based assets, you can readily convert them to cash.
- Low correlations: Gold often performs differently from stocks and bonds, meaning when they go up, gold may go down or vice versa.
In addition, gold offers other potential advantages:
- Diversification: Because gold is generally not highly correlated to other assets, it can help diversify portfolios, meaning the overall portfolio is less volatile.
- Defensive store of value: Investors often retreat to gold when they perceive threats to the economy, making it a defensive investment.
Those are a few of the major benefits of gold, but the investment like all investments is not without risks and drawbacks.
While gold performs well sometimes, its not always clear when to purchase it. Since gold by itself doesnt produce cash flow, its difficult to determine when its cheap. Thats not the case with stocks, where there are clearer signals based on the companys earnings.
Bullion Bars And Coins
These are the best option for owning physical gold. However, there are markups to consider. The money it takes to turn raw gold into a coin is often passed on to the end customer. Also, most coin dealers will add a markup to their prices to compensate them for acting as middlemen. Perhaps the best option for most investors looking to own physical gold is to buy gold bullion directly from the U.S. Mint, so you know you are dealing with a reputable dealer.
Then you have to store the gold you’ve purchased. That could mean renting a safe deposit box from the local bank, where you could end up paying an ongoing cost for storage. Selling, meanwhile, can be difficult since you have to bring your gold to a dealer, who may offer you a price that’s below the current spot price.
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Investing In Gold Indirectly
- Gold miner stocks: If an investor wanted to build their own portfolio, they could choose to buy stocks of gold mining companies.
- Gold ETFs: An investor can buy shares of an ETF designed to track the price of gold, less fund expenses. Gold ETFs may hold gold bullion and some cash.
- Gold mutual funds: Investors can gain indirect exposure to gold by purchasing shares of a mutual fund invested in stocks of companies associated with the mining of gold. Gold mutual funds may hold gold bullion or other types of precious metals.
- Options: Provides the owner of the option the right, but not the obligation, to buy or sell an asset that is linked to gold, such as an ETF.
Are Their Ethical Concerns With Buying Gold
More and more investors are worried about the social and environmental impact of their investments, and gold mining can leave a significant toll on the environment and raises concerns around human rights and governance since gold mines are located in conflict-affected or otherwise high-risk areas.
In 2019, the World Gold Council took steps to implement guidelines for member companies, as did the International Council on Mining and Metals. Both require that participating mining companies publish information on their progress publicly, making it easier for consumers to find.
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Advantages Of Physical Gold
- Inflation hedge. Advocates argue that, as a tangible asset, gold maintains an intrinsic value that always reflects the cost of living. There’s an old saying that an ounce of gold equals the cost of a quality business suit. That held in 1934 when men’s suits fetched $35, and it does today too, with gold close to $2,000 an ounce .
- Counterweight to stocks. Like other commodities, gold acts as a counterfoil to equities, usually moving in the opposite direction of the stock market. Case in point: When the subprime mortgage meltdown began in 2008, ushering in the Great Recession, goldwhich for years had been trading in the $400-600 rangeshot up to $1,000 per ounce and kept going for the next three years.
- Safe haven. Gold’s seen as a safe haven in uncertain times or whenever there’s socio-political turmoil. After the 2016 Brexit vote, its price rose over 10% in one month, for example. “Owning gold,” says Dennis Notchick, a certified financial planner at Stratos Wealth Advisors, “appeals to individuals who are concerned about the collapse of global markets or other threats to a government’s ability to back its currency.”
- Virtually indestructible. “Physical gold cannot be hacked or erased,” says Charles Stevens, COO of Bullion Box Subscriptions. “Gold cannot be destroyed by a natural disaster and it will not get worn down in time.”
How To Invest In Gold: An Investors Guide
From the time of ancient civilizations to the modern era, gold has been the world’s currency of choice. Today, investors buy gold mainly as a hedge against political unrest and inflation. In addition, many top investment advisors recommend a portfolio allocation in commodities, including gold, in order to lower overall portfolio risk.
We’ll cover many of the opportunities for investing in gold, including bullion , mutual funds, futures, mining companies, and jewelry. With few exceptions, only bullion, futures, and a handful of specialty funds provide a direct investment opportunity in gold. Other investments derive part of their value from other sources.
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Who Uses Futures Contracts
The use of futures contracts generally falls into two broad categories: hedging and speculative purposes. A hedger uses futures contracts to try and mitigate their price risk in an asset, while a speculator accepts this price risk in order to try and profit from favorable movement in prices. The market needs participation from both hedgers and speculators to function properly.
Hedgers may include producers, portfolio managers and consumers. For example, if a farmer produces corn and is concerned about the per-bushel price of corn falling and thus reducing his potential profit, he or she could sell futures contracts. If a corn farmer sold a futures contract today for delivery in five months at a price of $4.00 per bushel, then if the price of corn falls between now and the delivery date the farmer would lose money on his cash crop but would be offsetting those losses by gains made on the sale of the futures contract.
In other words, if Farmer Joe sold corn futures at $4.00 per bushel and corn prices drop to $3.50 per bushel, the Farmer Joe would have a $.50 profit on each corn future sold that would offset the $.50 loss he is seeing on his corn. By doing this, Farmer Joe has insulated himself from a large drop in the price of corn that could adversely affect his potential income.
Do You Have To Pay Taxes On Gold
Profits from trading securities like stocks and bonds are known as capital gains and are taxed at special long-term and short-term capital gains rates. But the IRS looks at profits you earn from trading gold and other collectibles differently.
Gains from physical gold are taxed as ordinary income if you own it for a year or less and a maximum 28% tax rate if you own it for longer than a year.
Its important to note the profits from trading gold ETFs are taxed as collectibles trading profits, not as capital gains like other stocks.
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