All You Need to Know About Gold Futures

While we all know a lot about investing in physical gold, digital gold and gold stocks, the majority of us don’t know much about gold futures. So, here’s an article that will help you know about gold futures. Take a look!

What are Gold Futures?

Futures are defined as an agreement or a financial contract that obligates a seller to sell a commodity to the buyer at a predetermined future date and cost. If the contract deals in gold, it is termed as gold futures.

To understand, let’s consider an example:

A man has a keen interest in investing a portion of his savings in gold. He decides to buy 10 grams of gold through gold futures at an agreed price of AED 1900 with delivery scheduled for 3 months ahead. The current gold price in UAE is AED 1920 and when the man takes the delivery, the gold price rises to AED 2000. In this case, the man has been able to save an amount of AED 1000.

Hope you can now define gold futures. A gold future is an agreement in which the buyer agrees to take the delivery of gold on a pre-decided date (settlement date) by making an initial payment on the day of signing the agreement and then completing the payment as per the contract.

Why Invest in Gold Futures?

The major reason to invest in gold futures is the opportunity to buy gold at a fixed price. The price fixed is usually lower than the current gold price in UAE and therefore there are high chances for the buyer to be in profit. A few other reasons to invest in gold futures are:

1. Trading through gold futures eliminates the need to pay the full amount right away.
2. Gold Future offers a provision to short sell.
3. Since the financial contract involves gold, investors can expect considerable liquidity.

Is It Safe to Invest in Gold Futures?

With every investment vehicle there comes certain default risks and gold futures hold no exception. Some of the risks associated with gold futures are explained below.

Since gold prices in UAE fluctuate very frequently, there are a few chances that during the period between the date of signing the agreement and the settlement day, the prices drop. This, in turn, can put the investor in a loss.

No one can predict the markets accurately; they can crash unexpectedly. Since gold futures are volatile, they may pay put in the investor in loss during the phases of instability.

What is the expiration date of a Gold Future?

The expiration date is a major point that should be considered while signing the agreement. It is the date on which the contract ends. To be more precise, it is defined as the last day of the life of the futures contract; it is the day on which, the difference between the actual and the price disclosed in the futures is settled down between the buyer and the seller.

The Bottom Line

Gold futures are known to provide a hedge against inflation. Investing in gold futures is a speculative play but, it is worth investing. They are considered as alternative investment class or a commercial hedge for investors who are looking for investment opportunities outside the traditional equity and fixed income securities. They are easy to buy and offer a provision to short sell and an ease to liquidate.