Developing a Basic Understanding of Gold Futures
Do you know what a gold future is? It is basically a deal to trade gold at some day in the future. However while the actual trade takes place in the future, the prices and quantity of the trade are set now – which is where gold futures prices come into play.
In short, you, as the buyer, won’t be paying for the gold just yet (not in full anyway, you might need to pay a deposit) and the seller whom you’re buying from won’t need to deliver yet either. The trade itself will complete at the future date that you both agreed on.
But gold futures prices aren’t just about what you agree to pay on. Just now we mentioned a ‘deposit’ that you might have to pay – and this is called a ‘margin’.
A margin is a component of gold futures prices that is present in every gold future trade. Because trades take place in the future, there is a temptation on both the part of the buyer and the seller to walk away from the deal if things don’t go their way.
For example, if you as a buyer agreed on gold futures prices but then the current price of gold began to drop, you’d end up actually paying more than the market value of gold when the time comes to complete the deal. In short – you’ll be losing money.
Similarly a seller that is selling a gold future would lose money if the price of gold began to increase and the agreed price was lower than the market value of gold at the time of the settlement.
To protect both parties from having either party back away, there is a certain margin lodged with a central authority that can range from 2% to 20% of the gold futures prices. As a buyer you should also be aware that this margin could actually increase if the price of gold begins to drop – so you might end up investing way more than you first thought when trading gold future.
This should give you a basic understanding of gold futures prices. And it should also allow you to see that a basic understanding is really not going to cut it.
As with any futures, trading gold futures is a highly complex market that involves a lot of speculation and trades that are often convoluted. It isn’t really the place for a beginner to be taking their money, and in fact even professionals with decades of experience can often end up losing big.
If you are determined to press forward and really understand gold futures prices inside out – you need to be prepared to do your research. Find out about the affects of speculation on gold future, and how you can use short term speculations to prepare for a much bigger move.
Of course, you’re going to need to have enough financial backing to be able to really go into the gold future market – but if you have the cash and you’re willing to accept the risks, the rewards could be great too!
All things said and done, gold futures prices is an area that has great potential for profit.
The only question is whether or not you have what it takes to venture into the gold futures market, learn from your mistakes, and accept the fact that you will probably lose money – at least initially. If you’re willing to do that, you should find that with experience and knowledge you’re able to make some handsome profits!