Gold Options and Futures – Dissecting The Bullion Paradigm

Gold Options and Futures – Dissecting The Bullion Paradigm

Although most people would point it right out that the best way to invest in gold is to buy physical gold bullion whether as bars, ingots or coins, there are other way through which one could invest in gold bullion.

Especially for investors who have a good grasp of the market mechanics or for those who are simply more sophisticated and experienced. However this article provides some insight about options and futures that are investment instruments which are associated with the investment bullion industry. To put it simply options allow investors to speculate on the price of gold in either direction.

The industry jargon includes a ‘call’ whereby when a call is opted for the investors hopes that prices will go higher as a ‘call’ fixes the purchase price and as prices get higher so do the margins between the fixed price and current price. In contrast a ‘put’ is when investors buy an option and expect the prices of gold bullion to fall. This ‘speculative scenario’ makes options a risky activity in buying bullion as investment, call or put regardless.

In most instances investors lose and based on stats 75 % of options expire without gaining any value at all. This is due to the complex nature of the options market which undoubtedly requires extensive experience and deep understanding of the trading machine.

It is a well know fact that the futures market is a high risk category investment and despite it being related to gold, it is not the gold prices that causes the losses, but the ‘time factor’ whereby time constraints force a sell or buy, which leaves investors with very little room to manoeuvre as they ‘must honour the contracts’. Even experienced investors recognise this risk and despite futures trading being the most complex among the derivatives linked to gold bullion big fortunes could be made and in an instant all may be lost.

It is true that gold mutual funds provide a helpful alternative but the risks are high and without proper backing and sufficient understanding engaging these investment options is not advised. Thus again, we have to look into the safest way of investing in gold and that is to buy gold bullion bit by bit, when prices are friendly such as it is now. Although the futures and options markets offer liquidity and leverage to gold buyers who prefer gambling and quick money, it is not for the working class hero as it could wipe out your savings in an instant.

Buying gold bullion in physical form bit by bit, each month on an allocation that is as small as 5 % of your total earnings could yield a good return later in future. Sometimes these yields can be exponential, especially during times of economic stress, when prices of precious metals usually go up and if history has though us well, on average an economic downturn occurs once in every decade at the least and this would be the time to sell gold.

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