If you are looking for protection against inflation, alternative investments or hedging, then futures contracts can be one viable alternative to meet your needs. Especially the gold futures contract. Trading in this futures market involves high risk and is not suitable for everyone. You as an investor can lose more than invested capital.
What is Futures Contract?
Futures contracts (such as gold) are a binding contract deal for the delivery of future gold commodities at an agreed price. Futures contracts have a fixed standard set by futures exchanges. These standard standards include quantity, quality standards, time and place of delivery. Only the price is variable.
Hedgers (hedging actors) use futures contracts as a way to manage the risk of price fluctuations on the purchase or sale of physical gold. In addition to hedgers, there are also speculators who have the opportunity to participate in futures market trading without physical support.
There are two different positions that can be done in the market. That is BUY position, is the obligation to receive physical gold shipments, and SELL position, is the obligation to make physical gold shipments. Most futures contracts offset before the delivery date. For example, this occurs when an investor with a BUY position initiates a SELL position in the same contract, effectively closing the initial BUY position.
Futures Contract Benefits
Trading futures contracts are held in futures exchanges. So futures contract trading offers the leverage, flexibility and financial integrity of commodity trading itself.
Leverage is the ability to trade and manage high market commodity values by using a fraction of the total value as capital. Trading futures contracts are performed with margin performance. This makes it only requires less capital than the physical market. This leverage provides higher risk speculators / higher investments. For example, one gold futures contract 100 troy ounces, or one gold bullion. The dollar value of this contract is 100 times the market price for an ounce of gold. If the market is trading at $ 600 an ounce, the contract value is $ 60,000 ($ 600 x 100 ounces).
In the futures market, opening a SELL and BUY position is just as easy. Market participants gain flexibility. So it becomes a boon for hedgers to protect their physical positions and for speculators to take positions based on market expectations.