Gold Futures Decoded

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Gold has a rich history and value interwoven into different cultures and traditions since time immemorial. People in the olden times considered it be a form of financial investment which every household must-have. Even today gold is considered an important form of financial investment which provides a hedge against inflation and safeguards an individual and their loved ones from phases of financial instability.

With progress in the field of investment today, several options are available to invest your earnings in gold. One can choose to invest in physical forms of gold by purchasing gold products like chains, bars, coins, jewellery, etc. or invest in paper form of gold like Gold bonds, Gold ETFs, Gold stocks, Gold Futures, etc.

Gold futures are a relatively newer way to invest and indulge in gold trade which is getting popular. The gold rate in UAE is extremely dynamic because it trades on the public exchange where the gold price is determined by demand and supply equation.

Many people purchase gold only for its ornamental whereas a lot of people prefer investing their earnings in gold as it is a simple and easy way to invest earnings in the modern era.

What are Gold Futures?

Gold Futures refers to a trading plan where a commodity is kept for trade, with the amount decided presently but the settlement scheduled for the future. To keep it simple, gold futures can be understood as financial deal in which investor agrees on taking the delivery of the gold at a mutually decided time by making an initial payment, with the complete payment to be made as per the agreement. The trade is usually based on speculation with some degree of risk involved in it.

The concept of gold futures can be explained with the help of an exemplary situation.

Sanjay wants to invest his savings in an easy and efficient investment plan. He decides to purchase a tola (10 gm.) of gold from the future at a mutually agreed price of AED 5,600 with the date of delivery scheduled for June, six months from the purchase. The current gold rate in UAE for 1 gram is AED 5650 and when he receives his gold as per the agreement the gold rate in UAE is AED 5675 thus helping him to save AED 25 at the current gold rate in UAE.

Advantages of Gold Futures

The various advantages of gold futures are as follows-

  • It reduces the hassles associated with storing gold in its physical forms.
  • Investing in gold futures can be started with little money, as it allows investors to pay an initial amount at the time of making the deal and the remaining amount at the time of delivery.
  • The overall investment option has a high level of liquidity.
  • In case the buyer is willing to sell the gold before the specified time there is a provision to short sell gold futures.

Risks Involved with Gold Futures

Some risks are involved with gold futures, they are as follows-

  • Default risk is a practical phenomenon, which can leave an individual lurched during the trade.
  • The price of gold is dynamic and can fluctuate. Its possible that an investor can lose his invested funds if the prices drop between signing the agreement and taking the delivery.
  • The returns from Gold futures can be volatile as the market can cash or go through instability.

Summing It Up

Gold futures can be an amazing financial tool for investors who are new to the world of financial investment. An important thing to consider while investing in gold futures is that these are dated financial tools that come with an expiry date. The trading activity ceases when the settlement date is reached.

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