Inflation is coming in hot, and many investors are looking for ways to preserve their purchasing power in this environment. Whenever inflation runs high, precious metals like gold and silver become popular assets since they predate the existence of government-issued currencies.
But unlike a stock or bond, a gold bar is a physical piece of metal that’s more difficult to store, transport or sell. Isn’t there an easier way to own gold? A proxy like gold futures can keep things simple. Learn where to trade gold futures now with Benzinga’s guide.
Best Brokers for Trading Gold Futures
Ready to trade gold futures? Get started with our list of the best platforms to open your brokerage account and start trading gold futures.
1. Best Overall: Interactive Brokers
Interactive Brokers is ideal for traders who want fast processing, cheap commissions, and access to a wide range of commodities markets. Interactive Brokers has some of the best margin rates and a powerful platform loaded with tools and indicators.
- You can use a range of tools that help you build your portfolio wisely
- You can margin trade on this site safely and for less money than with other platforms
- IBKR may seem to be almost too complex for some traders
2. Best for Physical Gold and Gold IRAs: Advantage Gold
Advantage Gold allows you to invest in physical gold or even open a Gold IRA, putting you at the forefront of the gold market and allowing you to invest in a manner that suits your needs, especially as you trust in the future value of gold. In these ways, you can protect your investments and hedge against risk in uncertain times.
- Gold allows you to diversify safely
- You can use this platform to get the diversity in your portfolio you are looking for
- You may not prefer to trade in physical gold
3. Best for Trading Multiple Assets: E*Trade
E*Trade is an online discount broker that mostly focuses on stocks, but it also offers affordable commissions on futures with discounts for active traders. It has two trading platforms, including the intuitive PowerTrader.
- You can use this platform to save money on investing
- You can also save uninvested money at a competitive APR
- You may not feel this platform is robust enough for you
4. Best for Fast Trade Processing: Tradestation
Tradestation doesn’t have the cheapest commissions, but they do have fast trade processing and a futures-specific trading platform called FuturesPlus. Tradestation also has a wealth of educational materials and access to multiple news and data sources.
- Tradestation has the educational tools you need that will help you get into the gold market and more
- This is a simple platform you can use when you want to begin investing and learn more about the markets
- You may prefer a platform that focuses more heavily on precious metals
What are Gold Futures?
Gold futures are contracts bought and sold on exchanges like stocks. Stocks represent a claim of equity in a public company, but a futures contract is an agreement to deliver a certain asset at a specific price at a future date. This asset could be shares of stock or a commodity like oil, gold or lumber.
The price of the contract fluctuates based on the price of the underlying asset. Since leverage is applied, these fluctuations can be volatile.
All futures contracts have an expiration and a set price. Unlike a stock option, where the buyer of the contract can choose to purchase or NOT purchase the shares, a futures contract contains an obligation for delivery at the set price at the expiration of the contract.
For example, if you purchase January gold futures with a set price of $1,700, you’ll be obligated to accept the delivery of the physical gold at the $1,700 set price when the contract expires in January. The only way to release yourself from this obligation is by selling the contract.
One of the more striking examples from the futures market came in spring 2020, when oil usage slowed and the futures contracts plunged in value because no one wanted to accept delivery. When prices turned negative, investors were no longer paying for oil delivery, but being paid TO accept the delivery of the product.
Since few investors are in possession of 2,000 ton oil tankers, the price continued to plunge. Because this obligation for delivery can create transactional headaches, many futures contracts are eligible to be settled in cash once the expiration hits.
Where Can You Trade Gold Futures?
Gold futures are traded on public exchanges like stocks, ETFs and options. But in order to trade futures contracts, you’ll need access to these markets.
In the U.S., gold futures are traded on commodities exchanges like the Chicago Mercantile Exchange or the New York Mercantile Exchange, which together are known as the COMEX. Internationally, gold futures can be purchased on exchanges like the Intercontinental Exchange (ICE).
Most traders will need a margin account in order to access futures markets since leverage is high when buying and selling futures contracts. You don’t necessarily need to use margin when trading futures, but traders will likely want to use leverage in order to control larger positions with limited initial capital.
For example, a single contract on the COMEX exchange entitles the buyer to delivery of 100 ounces of gold. With current gold prices near $1,800 per ounce, a non-levered trader would need $180,000 to open a gold futures position. However, with margin applied, this $180,000 position could be controlled with as little as $12,000 (15-1 leverage).
Why Trade Gold Futures?
Investors trade gold futures for 1 of 2 reasons: speculation or hedging. Speculation is most commonly done by individual investors who want exposure to precious metals like gold without the hassle of transporting, storing and insuring the physical product. Speculators can also use leverage to increase position size without needing access to large amounts of capital.
Companies and institutions also buy futures contracts to hedge their investments in certain commodities. Oil companies are a commonly used example here. Because drilling for oil is such an expensive and time-consuming process, oil drillers often buy oil futures to “lock in” their desired price.
A gold miner might choose to do the same with gold futures. While mining for gold doesn’t require the capital and manpower of oil drilling, it’s an unpredictable industry and naturally-occurring gold deposits often aren’t as plentiful or easy to reach as initially assumed.. To hedge some of this uncertainty risk, gold miners may choose to purchase gold futures to lock in their ideal price.
Can You Trade Futures Without Margin?
Yes, you can trade futures contracts without margin, but it takes considerable capital. One of the benefits of trading futures contracts is you can control a large position without risking a lot of capital up front. Using margin increases risk, but you can make large profits with relatively small investments, especially in the futures market where leverage can be ramped up.
But you don’t necessarily have to use margin to trade the futures markets. If you want to trade futures without margin, you’ll need to have enough capital to support the full weight of the position. No leverage is applied - you’re investing dollar for dollar. For example, with 20-1 leverage, a position worth $20,000 can be controlled with only $1,000. If you don’t use margin, you’ll need the full $20,000 to open the same position.
What is the Initial Margin on a Futures Contract?
Most traders will use margin when buying gold futures contracts. The rates of leverage may vary depending on your broker, but you’ll be able to open a larger position than your cash on hand would usually allow. But brokers still need to protect themselves from excessive leverage, so they establish certain limits to avoid getting overexposed.
Initial margin refers to the amount of capital required to open a leveraged position. Since gold is priced by the troy ounce, each futures contract represents a claim on a certain number of ounces. E-micro gold futures trade for 10 ounces per contract, so a single contract would be worth nearly $18,000 by the current gold price. But the initial margin to open this position could be as low as $1,000. Each exchange sets different initial margin rates, which is usually calculated as a percentage of the total value of the contract.
Benefits of Trading Gold Futures
There are numerous benefits to trading gold futures. Here are a few of the top reasons to look into gold futures:
- Leverage: Undercapitalized traders can control large positions without needing a ton of cash upfront.
- Longer trading hours: The futures markets are open 24 hours a day during the week. They still close down on weekends, but futures traders can access their markets at any time from Sunday evening to Friday evening if they see an opportunity arise.
- More tax efficient: Physical gold is taxed at the 28% rate for collectibles, which means that’s your rate regardless of your income level. Futures contracts still provide exposure to gold, but are taxed at capital gains rates.
- Owning physical gold is expensive: Keeping some gold jewelry in a safe doesn’t sound difficult, right? However, gold bullion is not only tax inefficient, but tedious and expensive to own. Gold needs to be stored somewhere and transporting or selling it can be a pain. Gold futures as just virtual pieces of paper that can be bought and sold with ease.
Drawbacks of Trading Gold Futures
Like any investment, there are also drawbacks to trading gold futures. Before you go forward, it’s important to be aware of the following:
- Amplified losses: Leverage cuts both ways and if your trade turns south, you could be hit with a margin call quickly. Using too much leverage can blow up an account in an instant and leave the investor owing more than their original investment.
- Exhaustion: If you’ve ever traded crypto, you know the stress that comes with a volatile asset that trades 24 hours a day. There’s nothing worse than going to bed and waking up the following morning to see your position has dropped 20% overnight.
Gold Futures: Exposure Without the Hassle
Gold futures can be volatile and risky, but they do offer an easier way to invest in gold without owning the physical metal. Gold bullion is expensive to transport and store, plus the tax rates on physical gold aren’t very friendly.
A futures contract can be bought and sold for a profit without ever owning an actual piece of bullion, but it’s important to know the risks and limitations of these derivatives. An entire investment can be lost without carefully constructed trades.
Frequently Asked Questions
Can you make money trading gold futures?
Yes. Gold futures are volatile derivatives that can often provide outsized profits. But leverage can be devastating if the price of the underlying asset goes against you. Margin calls and forced liquidations are common in futures trading.
How do you trade in gold?
Gold is a precious metal that can be owned physically, or purchased through proxies like gold futures, gold ETFs or gold mining stocks. Gold can be added to a portfolio using a number of different instruments.
How much is 1 gold futures contract?
As an example, a futures contract for gold represents 100 troy ounces, which is equivalent to one brick of gold. The value of this contract is determined by multiplying the market price for one ounce of gold by 100.