The Gold futures market
Excerpt from; “The Independent Investor Guidebook” by Bill Cara
While it could be a good speculative investment, gold is usually a poor investment for conservative investors unless you are into writing puts or calls for additional income. The gold futures market is that much more dangerous.
Gold futures contracts give the gold speculator the biggest bang for the buck. Similar to contracts for commodities, they can be handled by most brokers and are actively traded on the New York Commodity Exchange and the International Monetary Market in Chicago.
Gold futures charts. http://tfc-charts.w2d.com/chart/GD/W
You can buy and sell 100-ounce contracts with different future delivery dates on margins of 5% to 15%. Thus, with gold at $400 an ounce, each contract is worth $40,000, which you can leverage with about $4,000.
Be sure that you have ample collateral; gold prices can move fast, and when they go down, you must come up with more cash or securities or the broker sells out your position at the end of the day.
Most brokers ask for a minimum balance of $10,000.
It's wise to set target prices. You can let your profits run, but, to protect your holdings, give the broker a stop loss price: either at the price at which additional margin will be needed or at the average price of the last 30 trading days.
Thus, if you bought a contract when gold was $370 an ounce and used a 10% margin, the sell price would be $350 if you were conservative. As the price of the metal moves up, boost the stop-loss accordingly.
Even stops may not protect you. Commodity traders try to knock off those stops late in the afternoon--e.g., when the price of gold drops below $402, the professionals, knowing that amateurs have set stops at $400, will go short. This will drop the price again so that the trader may be able to buy back his contracts at about $395. He makes a quick profit and if you had put in a stop at 400 you're out of luck . . . and money...as the price moves higher to the 410-425 range.
In bull markets, trading in gold futures can be very profitable. A 5-point move is common. With a little patience, you can pick up a 10-point move.
The last secular bull market for gold was in the 1970s. The period from 1980 through to 2002 was a secular bear for gold (and a secular bull for paper assets). Of course, in any bear market there are several cyclical bullish phases, and for gold there were opportunities to make money on the upside for the past 20-some years. But not many.
The period from 2002 through to perhaps 2010, however, is likely to see a return of the secular bull to gold and other real assets. This will bring a return also to the number of professional futures traders in the gold market. I expect to see contract volumes increase.
Wednesday, November 19, 2003
Authored by: Bill Cara
