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
The price of gold falls 10% you'll lose just $500 with bullion, and your investment will be intact to earn you money if gold resumes its steady upwards trend.
But the same 10% fall will cost you $10,000 with futures, which is $5,000 more than you invested in the first place. You will probably have been persuaded to deposit the extra $5,000 as a margin top-up, and the pain of a $10,000 loss will force you to close your position, so your money is lost and Gold futures investing.
If you refused to top-up your margin you will be closed out by your broker, and your original $5,000 will be lost on a minor intra-day adjustment - a downwards blip in the long-term upward trend in gold prices.
You can see why futures are dangerous for people who get carried away with their own certainties. The large majority of people who trade futures lose their money. That's a fact. They lose even when they are right in the medium term, because futures are fatal to your wealth on an unpredicted and temporary price blip.
Gold Futures 'On-Exchange'
Big professional traders invent the contractual terms of their futures trading on an ad-hoc basis and trade directly with each other. This is called 'Over The Counter' trading (or OTC for short).
Fortunately you would be spared the pain (and the mathematics) of detailed negotiations because you will almost certainly trade a standardized futures contract on a financial futures exchange.
In a standardized contract the exchange itself decides the settlement date, the contract amount, the delivery conditions etc. You can make up the size of your overall investment buy buying several of these standard contracts.
Dealing standard contracts on a financial futures exchange will give you two big advantages:-
Firstly there will be deeper liquidity than with an OTC future - enabling you to sell your future when you like, and to anybody else. That is not usually possible with an OTC future.
Secondly there will be a central clearer who will guarantee the trade against default. The central clearer is responsible (among other things) for looking after margin calculations and collecting and holding the margin for both the buyer and the seller.
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