Quick answer: Probably not. But let’s put the pros and cons underneath the microscope.
The gold market can be played in several ways. You can buy gold bullion bars or coins. You can buy shares in gold funds – including exchange-traded funds (ETFs). You will find gold mining and processing stocks which benefit to varying degrees from higher gold prices. And you will find other forms of “paper” ownership of gold.
A commodity futures contract is one type 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’s no physical metal. No metal entails no counterparty risk because of loss or counterfeiting. Think the cost will fall? It’s easy to go short and profit if the cost drops. Compared to physical metals, futures trading can be quite a quick and easy proposition.
But futures markets also come with some serious disadvantages.
Leverage Futures are highly leveraged. Meaning that you only have to put on a fraction of a contract’s value – the margin – to “own” it. Currently, you can control 100 ounces of gold, worth about $140,000, with only $6700 cash. But it’d just take a 5% move against your position to wipe out your entire margin. This loss in margin because of leverage is usually attributed to the unusual volatility of futures prices. Futures prices are not 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 these 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 small speculator – you. Market power can be quite a decisive factor; specially when trading short term.
Commissions Add Up As you can avoid certain fees by not dealing in physical gold, you will find commissions and fees required to clear futures trades. Because futures contracts typically expire every a short while, they have to be rolled regularly- thus incurring more commission expense. Any savings because of not enough storage costs can be easily lost by the necessity to continuously roll your position.
Speculation in gold futures is a highly leveraged trade – no investment in gold or gold ownership. Futures are primarily made for hedging and quick speculation. Understanding the difference will save you money.