How to Invest in Gold Futures

Gold and other precious metals are an excellent way to diversify your portfolio. Adding securities that are non-correlated to the more common stocks, bonds and funds smooths out the fluctuations of the market. They also potentially increase returns and reduce your risk over the long term. There are many ways to invest in gold and other precious metals. In this article, we’ll explain how to invest in gold futures. Consider working with a financial advisor as explore adding derivatives to your portfolio.

Ways to Invest in Gold

Investors have many choices when it comes to investing in gold. Each has its own pros and cons and can be a good option, depending upon your circumstances. Here are eight ways to consider:

Gold bullion. One of the most popular ways to invest in gold is to own bars of gold. Investors buy bars of gold ranging from a few grams to more than 400 ounces. The most common sizes are 1-ounce and 10-ounce bars.
Bullion banks. Precious metal dealers offer allocated and unallocated gold accounts. Allocated gold is an asset that cannot be used for other purposes. Unallocated accounts are essentially unsecured creditors of the bank.
Gold jewelry. A popular choice for casual investors that offers multiple benefits: something to wear, a possible source of appreciation and the ability to be covered by most homeowner insurance policies.
Gold futures. These contracts allow investors to profit from future changes in the price of gold. Unlike an options contract, a futures contract requires both parties to follow through with the transaction, even if they are unprofitable.
Mutual funds and ETFs that own gold. These funds avoid the hassle and risk of owning physical gold while efficiently tracking the price of the commodity. Fund fees reduce your overall returns.
Gold coins. Coins are often collectibles that have values that aren’t always aligned with gold prices. Most gold coins weigh one or two ounces, but some are smaller.
Mining stocks. Owning shares in companies that produce gold. Value can rise with the increase in the price of gold and if the miner is able to increase production.
Mutual funds and ETFs that own mining stocks. Buying a fund eliminates the time and stress of picking a specific mining company. Funds also offer instant diversification and professional expertise in this niche.

What Are Gold Futures Contracts?

Gold futures contracts are exchange-traded contracts that allow investors to hedge or speculate on the price of gold. The contract buyer agrees to take delivery of a specific quantify of gold from the seller at a predetermined price on a set date. Most investors buy and sell gold futures contracts before the expiration date so that they don’t have to take possession of the gold. However, trading the contract allows them to take advantage of the price fluctuations before the contract expires.

Manufacturers that use gold to produce their products use gold futures contracts to lock in prices for this precious metal. They take possession of the gold and use it to create their products. Some investors also choose to purchase gold futures contracts because they view gold as a reliable store of value.

Advantages and Risks of Futures Contracts

There are several potential benefits from investing in futures:

Can profit from “call” or “put” contracts by taking advantage of price trends
Excellent liquidity with trades available nearly 24 hours a day during the trading week
Futures contracts are generally sold at a fraction of the price that gold is traded at

But there are also several risks, include the following four:

Increased leverage of gold futures contracts can magnify losses exponentially
Losses can exceed your original investment amount
Futures require execution of the transaction, even when unprofitable
Can be a complicated investment and is not suitable for all investors

How to Invest in Gold Futures

Stack of gold coins on a digital price chart.

If you want to invest in gold futures, you’ll need a brokerage account that supports trading on the COMEX divisions of the NYMEX and ICE. The contracts for gold futures are available in several sizes—100, 50, and 32.15 troy ounces, with the standard size being 100 troy ounces. This setup allows you to speculate on future gold prices without the need to physically hold the metal.

When trading gold futures, each contract aligns with these specifications:

Exchange. COMEX.
Contract size. 100, 50 or 32.15 troy ounces.
Minimum tick size and value. 0.10, worth $10 per contract.
Trading times. Gold futures are traded from 6 pm to 5 pm Eastern time on Sunday through Friday. There is a 60-minute break in trading that starts at 5 pm Eastern time. No trading occurs on Saturdays.
Principal trading months. Primary gold futures contracts are February, April, June, August, October and December.

Keep in mind that futures allow you to use leverage, meaning you can control a large contract with a relatively small amount of capital. While this can amplify gains, it also increases potential losses, so use leverage strategically.

When to Diversify Your Portfolio With Gold Futures

Diversifying your portfolio with gold futures can provide a hedge against inflation and economic uncertainty. Here are three common times when use this strategy:

When you expect a currency devaluation: Gold prices often move inversely to the value of the U.S. dollar. If you anticipate a drop in the dollar’s value, investing in gold futures could be beneficial.
During economic uncertainty: Gold is often seen as a safe-haven asset during times of economic instability or inflation. Adding gold futures to your portfolio when economic indicators suggest upcoming volatility can protect your wealth.
As part of a balanced strategy: Even during stable economic times, having a portion of your portfolio in gold can diversify your assets and reduce overall risk.

Bottom Line

Gold futures offer the ability to invest in gold without taking possession of it. These contracts are traded almost 24 hours a day and provide excellent liquidity if you want to buy or sell quickly. Futures trading can be complicated and are not suitable for all investors due to the ability to lose far more than your original investment.

Tips for Investment Planning

Most advisors recommend having a diversified portfolio. Adding precious metals offers additional diversification and non-correlated assets to your portfolio. Our asset allocation calculator can help you determine how much of your portfolio to invest in precious metals like gold and silver.
Investing in futures contracts can be rewarding, but it involves significantly more risk than traditional stock and bond investing. Speak with a financial advisor who can explain the pros and cons of this strategy and how it affects your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.