Gold is a unique asset class that has been used as a hedge against uncertainty in financial markets and has given reasonable returns over the longer term. During times of high volatility in the financial market, Gold is considered a safe-haven asset, and investors and traders generally flock to gold during such times. Gold has been a store of value since ancient times and has stood the test of time in providing long-term returns.
What are Gold Futures?
There are many ways to trade and invest in Gold. However, Gold Futures are some of the most widely used means to trade in Gold, especially because investors get an opportunity to trade in Gold without having to pay the full amount right away and without actually holding the precious metal. A Gold Future is an agreement to buy a certain quantity of gold at a certain price on a certain date. Gold Futures began as a means for gold manufacturers to hedge against price volatility. However, increasingly, gold futures have been used by traders and speculators to bet on the price trends of gold using the best gold trading app.
Gold Futures & Margin
At the time of the deal, the buyer of the gold futures pays a certain amount to the seller of the gold future with an agreement to make complete payment on a certain date. This initial amount paid to enter into a future transaction is called the initial margin. Additionally, the broker generally also charges some maintenance margin depending on the exchange rules.
Advantages of Futures Contracts
Gold Future contracts offer some of the following advantages of the trading app in Singapore:
No need for storing physical gold
Trading Futures Contracts offer financial leverage and the ability to take large positions using limited capital
Counterparty risk-managed by exchanges and trading app in Singapore.
Easy to initiate short positions
Futures Contract Specifications
Every exchange has its own set of futures contract specifications. For example, the COMEX and eCBOT have a 100-troy-ounce contract or eCBOT has a mini contract of 33.2-troy-ounce. The exchanges specify minimum price movements in the value of the futures contracts and set position limits for individual market participants.
Gold Futures Expiry
Gold Futures have dated instruments with an expiry date. On the settlement date, both parties must settle their side of the contract. A futures trader can either:
1. Offset the position in which neutralizes the trade taking the opposite position
2. Traders can Rollover their positions to contracts expiring next month
3. If a trader doesn't offset or rollover their positions, the only option a trader has is settlement wherein a trader is obligated to deliver his side of the contract by either physical delivery or payment of cash.
Risks associated with Gold Futures
Gold prices are extremely volatile and the fact that gold futures are leveraged positions, traders can lose extremely large amounts of money if gold prices move in the opposite direction.
While counterparty default risk is minimized by the exchanges and their clearinghouses, Since Gold prices can be extremely volatile, there is a chance that the entire market may crash or go through a phase of instability. Such a risk is called systemic risk. However, exchanges take full efforts to minimize such risks.
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