Those looking to capitalize on short-term movements in gold prices must choose whether to use futures or gold ETFs, both of which have distinct advantages and risk factors traders must consider.
NOTE: Trading futures is speculative in nature and involves substantial risk of loss.
Traders today have a variety of instruments they utilize for trading gold. Two of the most popular are gold futures and exchange traded funds (ETFs).
It is our opinion that gold futures offer numerous advantages over gold ETFs for daytrading, swing trading, and other trades where the intention is to hold a long or short position for a relatively short period of time. This article will highlight just some of the basic differences and similarities.
It is also our opinion that futures trading easily accommodates short selling, scalping, and daytrading. However, ETF daytrading and scalping must be done within the context of NYS Exchange Rule 431 and the rules for short selling gold ETFs will vary from brokerage firm to brokerage firm.
Gold Futures vs. Gold ETFs Basic Facts and Specifications
| COMEX GOLD FUTURES | GOLD ETF (GLD / IAU) | |
| Where Traded | COMEX futures exchange | Securities exchanges |
| Underlying | Gold | Gold |
| Size of one contract | 100 ounces | |
| Size of 1 share | Based on the price of 1/10 of an ounce of gold | |
| Ability (not obligation) To Take Physical Delivery |
Yes | Yes |
| Commissions | Negotiated commission charged on a per-contract basis. | Negotiated commission and may be charged on a per-trade basis or on a per-share basis. |
Efficient Use of Capital
A single futures contract is based on 100 ounces of gold. A single share of a gold ETF is based on one-tenth of one ounce of gold. Traders seeking to trade in units of less than 100 ounces will find an advantage and flexibility with gold ETFs, but it is our opinion that traders seeking to trade based on comparable-sized trading units will find that futures offer a more efficient use of capital, as illustrated in the below table.
Assume a gold price of $1,500 per ounce
| One Comex gold futures contract is valued at $150,000 | 1,000 shares of GLD trading at $150 equal $150,000 |
| Margin requirement to initiate a long or short position is $6,075 (as of August 3, 2011). Futures margin is not a deposit or down payment, but represents a performance bond (i.e. earnest money). | $150,000 to purchase 1,000 shares. If bought on margin, then $75,000 cash deposit is required and $75,000 bought on margin (which involves a cost of capital, since the trader is borrowing funds from the brokerage firm) |
| Scalpers and daytraders are often able to trade gold futures by posting a daytrade margin. Requirements will vary from firm to firm but are often as low as $1,000 per contract. | Recognized pattern daytraders can trade with a leverage ratio of 4:1 |
To balance out this presentation requires a reminder that the benefits that can come from leverage must be balanced against the additional risk that accompanies leverage. It is possible for trading losses to exceed the initial performance bond requirement in the trader’s account and could result in a substantial loss greater than the cash balance in the account.
By Larry Schneider, director of business development and sales, Zaner Group
Learn more about the differences and pros and cons of gold futures versus gold ETFs by downloading the report Trading Gold Futures vs. Gold ETFs.
MoneyShow.com readers can have free access to customizable gold, silver, and copper futures charts by registering for free, no-obligation access to the Markethead.com Web portal.
Trading futures and options is speculative in nature and involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources.
