What Are Gold Futures, And How Can You Get Invested?

Key takeaways

• Between March and October, gold has fallen from $2,016 to around $1,650, hitting its lowest level in 2.5 years
• Gold futures provide investors with one avenue to trade on gold’s price movements without owning the physical asset
• Gold futures can be used for hedging, speculation or as a quick, easy method to “store” value
• Other methods of gold investing include physical bullion, gold-related stocks and ETFs and Q.ai’s Precious Metals Kit

Gold has been on a surprisingly steep downward streak in recent months, plunging from about $2,016 in March to around $1,650 per ounce in mid-October. Last week, gold futures saw some excitement before falling again Monday to continue the downturn. All told, the yellow metal is near its lowest point in the last 2.5 years.

Gold has long been renowned as a store of value and a “safe haven” investment when inflation rises and investor confidence falls. But in the last year, despite sky-high inflation, gold prices have wavered as investors eyeball continuous rate hikes.

Currently, it’s unclear whether gold has bottomed out for the year, or if there’s still room for greater declines. But either way, investors can find opportunities in the precious metals market – if you know where to look.

For some, gold futures might provide just such an inroad.

What are gold futures?

To understand gold futures, let’s first look at futures more broadly.

Futures are standardized, legally binding contracts that trade on exchanges. The buyer (or investor) agrees to purchase a set amount of an asset at a predetermined price and date. On the other side of the transaction, the seller agrees to part with the asset (or pay cash value) under those specified conditions.

In particular, gold futures obligate a buyer to pay for and receive a set amount of gold at a future price and date. In the reverse, the seller has to hand over said amount of gold at that time.

Why invest in gold futures?

Gold futures are often used by companies like refineries, manufacturers and jewelers to lock in gold prices. Some also use gold futures to hedge their price risk on future deliveries by simultaneously betting on prices going the opposite direction. By buying in one direction and hedge in another, buyers can mitigate potential future losses.

Investors can use gold futures as a convenient alternative to actually purchasing physical gold. Futures allow investors to “store” value, hedge against recessions and market risk, speculate on prices and profit from short-term gold fluctuations. Generally, investor-owned futures culminate in a cash settlement, rather than gold delivery.

Pros and cons of gold futures

Like all investments, gold futures come with unique pros and cons, including substantial rewards and risks.

Pros of gold futures

• Added portfolio diversification beyond traditional stocks and bonds
• Can take advantage of potential profits regardless of market direction
• Offers greater flexibility and liquidity than buying physical gold
• Many futures accounts permit margin trading, adding greater leverage
• Gold futures trade 23 hours per day, 6 days per week
• Futures contracts are often cheaper than buying actual gold

Cons of gold futures

• Gold futures markets can be quite volatile, exposing investors to more risk
• Futures carry potential default risk (i.e., when a mining company can’t deliver bullion on time)
• Margin trading comes with increased risk of losing more than your original investment is worth
• Gold futures are generally recommended for advanced investors who can afford potential losses

How to buy gold futures and other gold investments

If you want to add gold to your portfolio but don’t have a clue where to begin, here’s what to know.

How to trade gold futures

Futures contracts are standardized per asset to facilitate trading. On the primary U.S.-based gold exchange, the New York Mercantile Exchange (NYMEX), each futures contract contains:

• A set amount of gold (usually 100, 33.2, or 10 troy ounces)
• An effective date that marks when the contract enters effect
• The expiration date, when the contract needs to be fulfilled
• Typically, gold futures in the United States close on the third-to-last business day of February, April, June, August, October or December

To start trading futures, you’ll need to sign up with a broker that permits futures trading. From there, you’ll need to fund your account and start buying gold futures through your account, similar to how you buy stocks through your brokerage.

Be sure to note the broker’s policy on gold investments, as most aren’t equipped to receive, store or ship physical gold securely. (In which case, you’ll “receive” your gold in the form of cash.)

Other types of gold investments

You can invest in gold in several other ways, too, such as with:

• Gold bullion or coins. While physical gold offers the joy of actual ownership, you’ll also be on the hook for storage and insurance costs.
• Gold-related stocks, including mining, distribution and certain manufacturing and jewelry stocks. Gold-related stocks offer a chance to profit off gold’s movements as well as capital appreciation. However, these investments may come with questions about your risk tolerance or certain ethical concerns.
• ETFs that invest in gold and gold-related securities. ETFs let you diversify your portfolio instantly while mitigating some of the risks of owning gold yourself.

If you want to purchase physical gold, you can start online or by visiting local pawn shops or gold stores. (Just be sure to check each piece’s authenticity.) Gold-related stocks, ETFs and mutual funds are potentially easier, as you can simply purchase shares in your existing brokerage or even retirement account(s).

When you should (and shouldn’t) buy gold

There’s not necessarily a right or wrong time to buy gold – simply a right or wrong time for you.

Many investors rely on gold as an inflation hedge, or even a hedge against economic recession. Because it’s largely countercyclical – that is, it doesn’t usually move closely with traditional investments – gold often rises when stocks sink, and vice versa.

As such, investors tend to flock to gold to protect their capital when stocks crash, the economy slides or the U.S. dollar weakens.

On the other hand, gold’s ability to store value is much less impressive during periods of economic growth. Though the metal holds its value fairly well, it doesn’t grow as quickly, which means owning too much gold at the wrong time can stunt your financial growth.

Additionally, factors like high interest rates, low inflation and high consumer confidence can prompt investors to lose faith (or interest) in gold. When investors leave the precious metal, the price may experience more short-term volatility and ultimately drop for a few weeks or months before recovering again.

Investing in gold with Q.ai

Gold, like other alternative investments, can provide a useful vehicle to diversify your portfolio and smooth out volatility when the market wobbles. Plus, the precious metal is often used to “store” value during economic or market downturns.

That said, too much exposure to gold can have adverse effects on your financial situation. Typically, experts recommend limiting precious metals to 10% of your portfolio or less. Carefully controlling your exposure ensures that you won’t inhibit your growth or introduce too much volatility at the wrong time.

If you want to invest in gold futures and other investments without worrying about extra research, Q.ai has just the thing. With our Precious Metals Kit, you can easily tap gold, silver and precious metals with the power of AI at your side. It’s gold investing, instant diversification and affordability all rolled into a tidy little package.

Download Q.ai today for access to AI-powered investment strategies. When you deposit $100, we’ll add an additional $50 to your account.