What are Gold Futures?

Gold futures in the stock market basically means exchange-traded contracts where the investor has to agree to provide an exact said amount of gold at a predetermined price on a future delivery date. They help precious metals firms protect gold price risk and provide investors with a simple alternative to traditional gold investment methods. In India, gold is always known to be the only value asset, and investing in  gold futures contracts as an anti-inflation protection is natural. The liquidity of these contracts makes capitalising on opportunities in various market conditions easier. We will learn more about what are gold futures trading is and how it works. 

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.

Types of Gold Options

There are two types of gold options:

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.

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.

Risks associated with Gold Future

After knowing what does gold futures mean, we will get into the risks which are associated with gold futures. Here are some of the risks explained in points. 

Default Risk: 

• This is when one party in the contract fails to meet their obligations.
• If this happens, the other party may face significant financial trouble.
• It can occur unexpectedly and leave an investor without their expected returns or assets.

Price Fluctuation Risk:

• Gold prices can change a lot over time.
• If the price of gold drops significantly after an investor signs a contract but before they take delivery, they can lose money.
• This risk means the value of the investment is not guaranteed and can go down.

Market Volatility Risk:

• The gold futures market can be very expected .
• There can come a time of market instability or even gold market crashes.
• This unexpected condition can make it difficult to expect the future prices of gold and there are then chances of losing money.

Understanding these risks can help investors make more informed decisions and better manage potential losses in gold futures trading.

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.

Factors Affecting the Price of Gold Futures

Here are some of the key factors that influence gold futures prices in India.

Global Market Influence:

• India imports most of its gold from other countries.
• It means that changes in global supply and demand directly affect gold prices in India.
• Events like geopolitical stress around the world can affect the prices of gold futures in India.

Currency exchanges:

• Gold becomes pricey in US dollars internationally.
• If the Indian rupee loses its value compared to the US dollar, it becomes difficult to import the gold as it becomes expensive.
• This  can lead to higher gold prices when purchased in India.

Economic Indicators:

• Gold is often known to be the secured asset during the times of high inflation.
• When inflation is high and interest rates are low, gold futures usually increase. On the other hand, high-interest rates can lead to lower gold prices.

Local Consumption Trends: 

• India has a high demand for gold, especially during festivals and weddings.
• Increased demand during these times drives up gold futures prices.
• Rural demand for gold, which can increase after a good monsoon season, also affects prices.

Government Policy on Imports:

• The Indian government sometimes changes import duties on gold.
• Higher import duties make gold more expensive, which pushes up gold futures prices.
• These changes are often made based on the country’s economic needs.

Influence of Gold ETFs: 

• Gold Exchange Traded Funds (ETFs) allow people to trade gold like stocks.
• Large movements in gold ETF investments can influence gold futures prices.
• This happens because of the price differences between physical gold and ETF units.

These factors together shape the gold futures market in India, with both global and domestic influences playing important roles. 

Conclusion
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.