Making money out of gold futures

by Madhubanti Rudra

We are in the middle of a great bull run on gold! If you are ready to take the plunge and want some cool returns by making a minimum investment, then the article is specially written for you. It will help you understand the nuances of futures trading in gold.

We are in the middle of a great bull run on gold! If you are ready to take the plunge and want some cool returns by making a minimum investment, then the article is specially written for you. It will help you understand the nuances of futures trading in gold.

‘Futures trading’ is a broad term involving a range of commodities from wheat to crude oil. Under the present global financial scenario, ‘futures trading’ in gold has become especially popular. Gold is in fact one of the most traded metals in the present times.

So what does trading in gold futures actually mean?

A future trading in gold refers to a kind of investment where to make profits, the investor uses his speculative abilities to envisage the price of gold rising or falling in the future.

Gold and all other commodities are traded between millions of investors across the globe, every day. ‘Futures trading’ in gold relies on the basic business rule that is: make profit by buying gold at a low price and sell it for a higher price.

The features of gold futures trading

‘Futures trading’ of gold is in the nature of speculative ‘paper’ investing. As such you don’t need to run the hassles of holding gold and protecting it; you only need to keep a piece of paper known as a futures contract.

Investment in futures of gold comes with a specific expiration date. However, you are not bound to hold the contract until this date. The fun of futures trading lies in your freedom of canceling the contract anytime you wish.

Let’s explain this scenario with this example:

• The Gold contracts are sold internationally in February, April, June, August, October and December. If somewhere in the end of April you are tipped that gold price will rise till mid June, you can buy a June gold contract. As the expiry date approaches closer, the contracts become more liquid and there are more traders in the market. This helps you make a reasonable profit preventing the price from soaring too high or dropping too down.
• But if you come to know that gold price will keep on rising till the year end, you need to buy a December contract for maximum gains.
• There exist specific standardization norms for all commodities. Not only for gold, but for all the commodities, investors have to hold a specified amount and abide by the prescribed quality. For Gold futures it is the 100 troy ounces of 24 carat gold.

The gold futures can be traded in many ways: it can be treated as a pure speculative product, as a hedge against inflation or a purely commercial hedge, or as an asset class of investment, futures contracts are the most viable product for making money amidst all the present day financial chaos.