The following article is a reprint from http://www.futuresource.com/, FastBreak Newsletter June 25, 2010 by Drew Rathgeber.
About: Drew Rathgeber began his career at one of the country's largest gold and silver dealers and has since transitioned into futures dealing with similar commodity products. Drew is a senior trader at Trade Center, LLC; holds a Series 3 commodity license & registered with the Commodity Futures Trading Commission (C.F.T.C) and is a Member of the National Futures Association. With his training and experience, he created a trading philosophy, known as the "Rath" overlay, a tool designated to help the everyday trader.
Two of the primary products I’ve been trading for some years has been spot and futures gold. Let me tell you there are significant differences between these two gold trading markets. Let’s start off with spot gold or what the general public calls physical gold.
Unfortunately the physical gold typically is sold to the general public as a safe haven or less risky. This couldn’t be further from the truth. Physical gold or spot gold is completely unregulated and in my opinion has less than high ethical standards as I believe you will find in the futures markets. Therefore, investor buy at own risk in this market. There are many bait and switch tactics that can and will happen.
For instance, you call one of these gold dealers from a television advertisement to buy gold and have it delivered to your home. The next thing you know your account representative talked you into buying gold on leverage typically of 5 to 1. Typically, on the next call you receive from your account representative, you’re on margin call! You listened to the account representative and his predictions of how rich he will make you. In my opinion, NO ONE knows where the market is going but the markets.
Now let’s focus on how the physical market makes money even though they say “No Commission”. It’s through the spread or what they call a “Bid” and “Ask”. This spread is typically 1.5% up to 3.00% and beyond of the total purchase price of the transaction. Let’s say you invest $10,000 with one of these companies. They put you on 5 to 1 margin, so you’re actually purchasing $50,000 worth of gold. You are then charged a 3% commission on this $50,000 which equals $1,500! Then you add on their storage fees, interest’s costs, service charges. Starting to get the picture? The odds are you will NEVER make money rather be churned into a commission check. How do they get away with this? Neither the Commodity Futures Trading Commission nor the National Futures Association regulates these firms. Who are their typical investors, the people who need the regulation most, the elderly and unsophisticated. Please be very cautious in the spot market and check the Better Business Bureau website. I believe it is best to buy physical metal with home delivery and store it in your safe. Don’t be duped by a fancy talking non regulated sales guy. If it sounds too good to be true, it probably is.
Now let’s talk about the futures and the regulated side. First of all, you have to deal with a Series 3 licensed brokers who should have some ethical standards he or she must follow. They are regulated by the National Futures Association and the Commodity Future Trading Commissions. You deal directly with clearing exchanges, for every buyer there is a seller.
One thing you have to take into consideration is the contract specification and what contract size you’re trading. There are two options with gold, one the full size contract, 100oz of gold and the other is the mini 33.3oz of gold. Then you have to understand the contract value and how much leverage you want to use. If gold is trading at $1,000.00, the full size contract value is $100,000.00. You need only $6,750 to control the entire contract. It’s like buying a house and putting 10% down, however you are responsible for the entire contract up or down. To lose your entire investment the market needs to move $67.5 dollars and game over. However if it moves in your favor $67.5 you have doubled your money with very little down. It’s a double edge sword and I’m sure you’ve heard of that.
The other great thing about futures gold is the long trading day, almost 23 hours a day Sunday – Friday. The spot firms you usually have to deal with their company hours and when they are open. With futures gold you can electronically trade almost any time! This is a big advantage in adverse market conditions, plus you are emailed statements daily and will have access to free quotes and charts with any decent trading software. To test our trading software please visit: www.tradecenterpro.com download and demo today at no charge!
So ask yourself which way would you like to trade? The unregulated, smoke n’ mirrors physical/spot market, or the regulated futures markets? You need to find a good broker that can honestly look at your investment objectives then give you advice of exactly what you need.
Futures trading involves substantial risk and is not suitable for all investors
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