If you are bullish on gold, you can profit from a rise in gold price by taking up a long position in the gold futures market. You can do so by buying (going long) one or more gold futures contracts at a futures exchange.
You decide to go long one near-month NYMEX Gold Futures contract at the price of USD 851.00 per troy ounce. Since each NYMEX Gold Futures contract represents 100 troy ounces of gold, the value of the futures contract is USD 85,100. However, instead of paying the full value of the contract, you will only be required to deposit an initial margin of USD 4,302 to open the long futures position.
Assuming that a week later, the price of gold rises and correspondingly, the price of gold futures jumps to USD 936.10 per troy ounce. Each contract is now worth USD 93,610. So by selling your futures contract now, you can exit your long position in gold futures with a profit of USD 8,510.
|Long Gold Futures Strategy: Buy LOW, Sell HIGH|
|BUY 100 troy ounces of gold at USD 851.00/oz||USD 85,100|
|SELL 100 troy ounces of gold at USD 936.10/oz||USD 93,610|
|Investment (Initial Margin)||USD 4,302|
|Return on Investment||198%|
In the examples shown above, although gold prices have moved by only 10%, the ROI generated is 198%. This leverage is made possible by the relatively low margin (approximately 5%) required to control a large amount of gold represented by each contract.
Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.
To buy or sell futures, you need a broker that can handle futures trades.
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