Gold, as a commodity occupies a very important place in the hearts and minds of billions across the globe, with countries and individuals stocking up on this precious resource in a bid to secure their future. Today, it can be purchased and traded through different mediums at different gold rates, ensuring that one doesn’t have to physically store this precious metal. Gold Futures are one such popular way to indulge in gold trade, and while this term might not ring a bell for everyone, it is fast gaining pace in the country.
What are Gold Futures?
A future, in simple words, refers to a trading scheme in which a commodity is up for trade, with the amount decided presently but a settlement scheduled for a future date, i.e. the agreement is entered into but the gold will be given only on the future date. Gold Futures refers to a deal in which an individual agrees to take delivery of gold at a mutually decided upon date by making an initial payment, with the complete payment to be made as per an agreement. This trade is based on speculation, with an element of risk involved.
Example: Miss Rita has a keen interest in owning gold and decides to invest a portion of her savings in it. She chooses to buy 10 grams of gold from the futures market at an agreed price of Rs 5,600, with the delivery scheduled for August, four months from now. The current price of 1 gram gold is Rs 5,650 and when she takes delivery of the gold the price is Rs 5,675, thereby helping her save Rs 75 at current rates.
Advantages of investing in Gold Futures
Some of the major advantages of Gold Futures are mentioned below.
- It eliminates the need for immediate storage, as a buyer will not have to worry about finding secure storage facilities to store the gold.
- Participating in this trade involves lower amounts, as a buyer can pay a certain amount at the time of making a deal and the remaining on signing the agreement.
- There is considerable liquidity on offer.
- There is a provision to short sell.
Risks associated with Gold Futures
Some of the risks associated with gold futures are mentioned below.
- Default risk is a very real phenomenon, which can leave an individual in the lurch during trade.
- Gold prices can fluctuate and it is possible for an investor to lose money on his/her investment if prices drop significantly from the time of signing an agreement and taking delivery.
- Gold futures can be volatile and there is a chance for markets to crash or go through a phase of instability.
Gold Futures Expiry
An important aspect to consider before opting for Gold Futures is that these are dated instrument which have an expiry date. These commodities stop trading before their agreed upon settlement date is reached. All dealings will be suspended before the settlement date, ensuring individuals have adequate time to figure out their current position.
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