Gold Futures Price
The gold futures price is different than the gold price in the cash (physical) market.
Generally, the price of a commodity for future delivery is higher than the cash price due to carrying costs (insurance, interest,
and warehousing fees). This is called contango. The opposite of contango is backwardation. Backwardation is when the price
of a commodity for future delivery is lower than the cash price Backwardation is normal in a “seller’s market.”
When you trade gold futures, your futures price depends on where you get into the market.
After you post your initial margin, your profit or loss depends on where you enter and exit the market (minus transaction
costs).
For example:
The
contract size for gold is 100 ounces. So each $1 move equals $100. As the market moves your account value adjusts. If
your account value drops below the maintenance margin a margin call is due. A margin call can be met by offsetting positions
or adding money to your account.
Gold commodity futures contract trading can be both highly profitable and extremely risky because of leverage.
Leverage is the ability to control a large quantity of a commodity for a very modest investment. That investment is called
margin. Be certain you understand the risk of trading futures on margin before you consider opening a gold trading account.
Trading futures is like driving a car without
insurance. You save the insurance premium, but if you crash you will wish that you were insured. If you have very deep
pockets or deal with the physical gold product then futures may be for you. If you are a speculator with a limited amount
of risk capital then gold options are a better way for you to invest in the gold market.
