Buying And Selling Gold: Bullion Versus Futures Contracts

Investors look to build positions in gold for several reasons: some buy it because they believe it will rise is price, hoping to sell it later for a profit. Others buy gold with the intention of holding it as a hedge against inflation or a potential source of emergency capital if problems with the value of currency emerged.

Physical Gold Versus Gold Futures: What’s The Difference?

Often, investors looking to speculate in gold, hoping to buy it now and sell it later at a higher price, participate in futures markets. Traditionally, contracts for gold futures were traded on the floors of futures exchanges by brokers. Changes over the past several years have resulted in the vast majority of trading volume being moved to electronic markets, which trade almost 24 hours a day.

Some New York, Dallas, and Vancouver bullion investors, and other around the world, are less concerned with the short-term fluctuations in price experienced in gold markets, and are more interested with maintaining possession of a certain physical amount of gold as a source of protection against value declines in other assets, inflation, and currency fluctuations.

A gold future gives the purchaser an obligation to take delivery of a standardized amount of gold, both mini- and full-sized contracts exist, and put up an amount of good faith money, known as margin, when entering into a contract. If the price of gold falls after purchasing it, the purchaser may be required to put up additional margin, a process known as a margin call, or be forced to sell the contract on the open market. It is entirely possible to owe more money, potentially significantly more, than one originally invested, when dealing in gold futures contracts.

Gold Futures And Gold Stocks: Related, But Different, Investment Vehicles

While it is possible for gold bullion investors to lose money, particularly if forced to sell gold when prices are lower than when purchased, except in exceptional circumstances, it would seem that the total risk a bullion investor is exposed to is limited to the amount invested – perhaps giving a certain amount of peace of mind to bullion investors not afforded to futures contract speculators.

Still another way investors participate in the market for gold is through the stock and bond markets. Thousands of gold mining companies offer both equity and debt investments that retail investors buy directly or own indirectly through mutual funds and ETFs.

Stock investors hope that the company they own shares in is able to increase its profits each year; many professional investors see earnings growth as a primary driver behind stock price increases. Some stocks also pay dividends.

Bond investors lend gold companies money, sometimes for the purchase of specific equipment or other assets, and expect to not only receive their money back, but to receive some type of regular coupon payment. As long as the company remains solvent, investors will receive their money, plus interest. Bonds liquidated before maturity may attract less than their full value.