What are Gold Futures?

What are Gold Futures?

Gold futures are standardized, exchange-traded contracts in which the contract buyer agrees to accept delivery of a particular amount of gold from the seller at a predetermined price on a future delivery date. Gold futures allow precious metals firms to hedge their gold price risk on an estimated future purchase or sale of gold. They also enable investors to use a simple alternative to traditional gold investment methods.

Gold is often regarded as the ultimate repository of value. Purchasing gold futures contracts as an anti-inflation hedge might be their primary application. The liquidity of gold futures contracts frequently makes capitalising on opportunities in practically all market circumstances simpler.

How to Invest in Gold?

After understanding the gold futures meaning, let's have a look at investing in gold:

  • Gold Bullion: Direct purchase of physical gold in the form of bars, coins, or ingots, often stored in secure vaults or personal safes.
  • Gold Funds: Investing in mutual funds or exchange-traded funds (ETFs) backed by physical gold reserves, allowing indirect ownership without holding the metal physically.
  • Gold Mining Stocks: Investing in stocks of companies involved in gold mining, presenting an opportunity to benefit from potential profits and dividends based on mining operations' performance.
  • Gold Futures: Engaging in futures contracts, agreeing to buy or sell gold at a predetermined price on a specified future date, often used for hedging or speculative purposes in financial markets.

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Table of Content

  1. How to Invest in Gold?
  2. Types of Gold Options
  3. Benefits of Investing in Gold Futures
  4. How to Start Investing in Gold Futures?
  5. Gold Options vs Gold Future Contracts
  6. Expiration of Gold Futures

Types of Gold Options

There are two types of gold options:

  1. Gold Call Options

    Up to the expiration date, it gives the holder the option, but not the obligation, to buy a specific amount of gold at the strike price. A call option gains value in response to an increase in the price of gold since the buyer is locked in a purchase at a lower cost. When you purchase the call, you are not obligated to purchase gold; it is only an option. In contrast, if you sell the call, you will be forced to sell the gold at the agreed-upon price if the party on the opposite half of the contract requests delivery before the contract's expiration date.

  2. Gold Put Options

    It gives the owner the option, but not the obligation, to sell a specific amount of gold at the strike price before the expiration date. When the price of gold declines, a put option gains value since the seller locked in a sell at a higher price. If you buy the put, you are not obligated to sell the gold; it is only an option. When you sell a put, you cannot buy gold from the person holding the other side of the contract at the set price.

Benefits of Investing in Gold Futures

Following are a few of the critical Benefits of gold futures:

  • Because a buyer can pay part of the price when creating a transaction and the remaining amount after signing the contract, engaging in this trade needs less money.
  • Liquidity is abundantly accessible.
  • A clause that allows for sentence length reduction exists.
  • Because the buyer won't have to worry about finding a safe place to keep the gold, it reduces the need for speedy storage.

How to Start Investing in Gold Futures?

You must create a commodities trading account with a recognised broker before starting trading:

Step 1: Opening a trading account requires filling out a form and submitting standard KYC documents, such as proof of identity and residence, a passport-sized photo, bank account details, and so on.

Step 2: After your account is opened, you have to deposit the margin funds into a margin account with the broker. The Gold Futures contract document contains the margin rate. 

Step 3: If trading losses cause you to lose money on your original margin, you will have to deposit a maintenance margin. That's the sum that has to be paid to maintain the original margin.

Step 4: Once you have this money, you may trade gold futures online Monday through Friday from 9 am to 11 pm.

Gold Options vs Gold Future Contracts

In some ways, a gold option is similar to a gold futures contract in that the price, expiration date, and dollar amount are all fixed. A futures contract, on the other hand, binds the buyer or seller to purchase or sell the agreed-upon amount of gold at the agreed-upon price.

On the other hand, an investor who owns a gold option has the right but not the obligation to claim the proper position, depending on whether they hold the call or put option.

Expiration of Gold Futures

Remember that gold futures are dated products with a predetermined expiration date before investing. These commodities stop trade before the settlement date that has been decided upon. All transactions will stop before the settlement date, allowing individuals ample opportunity to evaluate their current circumstances.

Overall, there are several ways to invest in gold, including bullion, funds, mining stocks, and futures. The historical and cultural significance of gold, particularly in nations like India, adds to its appeal as an investment. In the financial markets, gold futures and options provide possibilities for hedging and speculating. It is necessary to create a commodities trading account with a reputable stock market app to start trading gold futures.

FAQs on Gold Futures

The price of gold fluctuates in India in parallel with the world market price. When there is less volatility in the market, it is ideal to trade gold. With modest market volatility, 11:00 am to 4:00 pm IST are good for selling spreads.

With gold futures, you may invest in the metal without buying any, as they have high liquidity.

Gold futures are exchange-traded agreements between buyers and sellers wherein the buyer commits to purchasing a certain amount of gold at a fixed price at a later time.

International markets such as the Tokyo Commodity Exchange and the New York Mercantile Exchange (NYME) provide gold futures for sale. Gold futures trading occurs on India's Multi Commodity Exchange (MCX).

Financial derivative contracts, or futures, require the parties to trade an asset at a specific future date & price.