Futures versus Physical Investing In Gold and Silver

Posted by Insignia Consultants

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InsigniaFuture investing is better than buying physical gold and silver, or so says my client Mr.Mittal in Pune. Mr.Mittal is a long term investor. But he has a question whether one needs to be on the buy side or sell side. For the long term I have been recommending physical investment.

Case for futures investing

In long term futures investment most of us make losses due to inability to meet margin call requirements on time. Secondly the second month futures are always higher than current months futures and there is always a roll over cost if one is long. The price of gold August futures is always higher than gold June futures. If one is long in gold then at the last day of rollover period there is a cost involved. Suppose you were long in gold June futures at $1590 and on 31st May (the last day of rollover), there is cost of over $2.

(A) Bullish markets: In case of bullish markets one can easily pay the rollover premiums and still make a profit

(B) Bearish markets: In case of bearish markets the big question is how long can one keep on paying roll over premium on long positions.

Long positions in futures markets

I am not taking short positions in the above as most of us have a tendency to buy first and sell next. In futures investing if you are long and have to rollover the positions, one should always relook the long term direction. If there is slight hint of a bearish trend then one should always book the loss instead of paying roll over premiums. Just remember how many of you have incurred roll over cost on silver futures when prices were at $37.00. You paid higher roll over premiums and yet booked losses.

Short positions in futures markets

Short position in futures markets is all about the ability to meet margin call requirements. How many were caught short when crude oil prices rose from $60 to $147. Most of us booked losses as we did not have margin money. If we had the margin money and kept on rolling over the short futures till date we would have made millions. If you were short in silver futures at $30.00 and kept on rolling over short positions till now, you would have made millions.

Futures trading my view

If you have the ability to meet margin calls then being on the short side is a far better option than being on the long side. However patience will be tested even if one has all the margin calls. In my experience one falters at the leg of an adverse position in futures market despite having all the money to meet margin money.

Case for physical investing

Physical investing is all about buying first and selling later. One needs to take a view of the intended period of investment and invest if the direction is bullish in that period. Margin call pressures are not there unlike future investment but still we need to be prudent while investing in futures market and not get carried away by emotions.


Disclaimer: Any opinions as to the commentary, market information, and future direction of prices of specific currencies, metals and commodities reflect the views of the individual analyst, In no event shall Insignia Consultants or its employees have any liability for any losses incurred in connection with any decision made, action or inaction taken by any party in reliance upon the information provided in this material; or in any delays, inaccuracies, errors in, or omissions of Information.Nothing in this article is, or should be construed as, investment advice.