Gold Futures Contracts

There are numerous ways to take part in the gold rush that is dominating the atmosphere of the stock market these days. Many people prefer to put their money in physical amounts of gold. They probably do this for psychological reasons: in a time of uncertainty, it feels good to own something solid that has demonstrable value.

Others take a conservative bent and put their money in index funds and gold mining companies. They prefer the long-term security that appears to come with these investments.

Some investors turn their sights on gold futures contracts. These financial instruments are faster-paced and require investors to pay more attention to their portfolios. However, they offer opportunities to make money even faster than you can while waiting for the market value of gold to increase.

What Are Futures?

Futures seem simple at first but they take some thought to understand completely. Essentially, they appear like very necessary parts of managing any sort of transport of goods. Most futures have to do with the delivery of commodities, though there are exceptions to this rule.

Each future is a contract between two parties. The contract stipulates who will buy or sell a specific quantity of certain goods for a set price on a given date. The goods involved are usually things that are consumed or used up in industry, such as wheat, salt or iron. How this turns into a profitable venture is slightly more complicated.

For the purposes of this examination, consider a gold futures contract. The contract stipulates that the present holder will sell a quantity of gold in a month for $1,350 an ounce. However, before the expiration date of the contract comes, the value of gold rises to $1,400 per ounce.

The contract holder will probably sell the contract after buying it for $1,350 per ounce. Selling in this situation is called going short. The holder thought that the price of gold would likely go down before then and got out of it.

The buyer of the contract went long. He or she thinks that the price of gold will continue to rise. He may sell the contract again before the date arrives.

Why Gold Futures?

Gold futures are becoming very popular because this precious metal is making a lot of waves and a lot of headlines. It has gained an incredible amount of value in the last few years.

Concerns about the quality of paper currencies have driven many individual and institutional investors to begin hoarding quantities of gold. China, India, Russia and others are all taking large shipments of this metal.

Not only is the price high, but its fluctuations in one day can be considerable. This is ideal for futures work because you can make money on futures whether an underlying asset increases its price or decreases it.

If you want to deal in gold futures, you will have to stay very focused on your investments. Futures are not for the average investor. You have to be motivated to watch for the best deal so that you do not get caught selling your contract for less than you paid.

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