Quick answer: Probably not. But let’s put the pros and cons beneath the microscope.
The gold market could be played in a number of ways. You can get gold bullion bars or coins. You can get shares in gold funds – including exchange-traded funds (ETFs). There are gold mining and processing stocks which benefit to varying degrees from higher gold prices. And there are other types of “paper” ownership of gold.
A commodity futures contract is one kind of paper ownership. Gold futures offer some distinct advantages for several traders. Storage investing, insurance and transportation of the physical metal don’t drive up costs – because normally there is no physical metal. No metal entails no counterparty risk due to loss or counterfeiting. Think the cost will fall? It’s simple to go short and profit if the cost drops. In comparison to physical metals, futures trading can be a quick and easy proposition.
But futures markets also include some serious disadvantages.
Leverage Futures are highly leveraged. That means that you merely have to put up a fraction of a contract’s value – the margin – to “own” it. Currently, you are able to 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 eliminate your complete margin. This lack of margin due to leverage is often related to the unusual volatility of futures prices. Futures prices are no more 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 worthiness of the holdings by going short in the futures markets. These hedgers and producers of gold are generally the bigger players in the futures markets – and they often 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, there are commissions and fees necessary to clear futures trades. Because futures contracts typically expire every month or two, they need to be rolled regularly- thus incurring more commission expense. Any savings due to insufficient storage costs could be easily lost by the requirement to continuously roll your position.
Speculation in gold futures is a very leveraged trade – no investment in gold or gold ownership. Futures are primarily created for hedging and quick speculation. Understanding the difference will save you money.