Guru Speak

During the past years, though increasingly volatile, the gold price has still maintained a positive outlook. Investors have therefore paid very close attention to goldprice movements to search for the opportunity to make profits.

Among the vehicles for gold investment, gold futures are one of the most popular instruments. Trading volume has grown rapidly in many global exchanges such as Japan, New York, Shanghai and India. Last year the gold futures trading volume in COMEX, a commodity exchange in New York, was 78,000 tonnes while the global demand was around 4,000 tonnes.

Similar to other countries, varieties of gold instruments have received overwhelming attention from Thai investors including Gold ETF, goldlinked instruments and the soontobelaunched gold futures.   

We may wonder what gold futures are, and if they are similar to spot gold. Let's try to address these questions one by one.

Gold futures are an agreement between a buyer and a seller to buy and sell gold at a price determined today but to be delivered in the future, perhaps two months later. In other words, you enter into agreement to buy or sell but at this point you are not actually buying or selling.

As a result, you do not pay for or receive the entire amount of the gold value as you would when you buy gold from goldsmith. Instead, you are required to pledge money as a deposit - a form of insurance that you will perform your obligation as previously agreed. Such a deposit is called a margin and it is typically around 10 per cent of the contract value of gold futures.

Regardless of whether they are a buyer or seller, investors are required to pledge a margin.

This is because the gold futures price could move either up or down, thus resulting in either a gain or loss for both buyer and seller. If it moves up, buyers gain but sellers lose. On the other hand, buyers lose and sellers gain if the futures price moves down. Every day your open position will be evaluated and the gain or loss will be a credit or debit from your margin account.

At this point, you may conclude that buying gold futures is better than buying spot gold due to the lower initial investment. Not exactly. Although the initial investment paid for gold futures is around 10 per cent of what would be paid for spot gold of the same value, you would need to have more than the initial margin as you will need to pledge more money if the gold price movement goes against your position. In contrast, if the gold price moves in your favour, you will enjoy a very high rate of return with a small investment. This risk is the main difference between gold and gold futures.

Should you buy spot gold, you will have an unrealised gain or loss when the gold price appreciates or depreciates. The gain or loss is not realised until you sell it. No more money movement involved. You could keep spot gold and bequeath it to your children.

In contrast, if you trade gold futures, you futures position will be evaluated every day.  More money may be needed as additional margin if the futures go against your favour. At the expiry of the contract, you will be forced to realise the gain or loss, but if you are a winner in the game, a lucrative investment return is your reward. Besides, gold futures give you more flexibility as you could short futures when you think the price will go down before you buy gold futures back later.

So is trading gold futures better than trading spot gold? No hard and fast rule applies to all. Investors should make their own judgements. If you want to trade leverage products like futures, you should be able to accept a higher risk and be very disciplined about stopping the loss when the market goes against you. If you do not want to accept a high risk and are willing to keep gold to pass on to your children, spot gold would be a better choice.