Gold Futures versus Leveraged Metals

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

Investor Power through Education - The Manifesto

Our Core Beliefs


Investing, or more specifically trading futures contracts such as the E Mini is evolving and changing. Since the late 1990’s the path of the investor has changed. It began with individuals rolling up their collective sleeves, delving into burgeoning system development platforms or charting programs. As the stock market and all the excess funds sloshing around grew into the new millennium onwards, we believe investors were more complacent. They turned investment dollars over to managers. Why worry, was the thought as everything seemed to turn to gold.

It is a different world now. We believe investors/traders want to be empowered with education and information. We believe the change in happening in the investment culture. Here is where we think the world of investing and E Mini futures trading is going:

Empower Investors and Traders

Easy to understand information is just the first step. Since Wall Street was founded, investors have been shut out by the jargon of the industry. The logic seemed to be, if we make it complicated enough then investors will be forced to rely on managers and other investment professionals to sort things out. We believe that by putting things in plain language, we not only help the investors, we include them.

By including investors and traders in the conversation we foster better communication. When humans are confused, they tend to shut down and actually ask fewer questions. By creating a dialog between clients and educators/investment professionals, we foster and nurture discovery.

We believe in providing quality information at an affordable price. All too often investors are put in a situation where they pay thousands of dollars for an indicator, a course, a lecture or get shut out. What if a fair price was charged for information? What if the relationship was put shoulder-to-shoulder with service?

What if trading courses were developed around the education level of the individual taking the course? It seems to make sense that not every student is operating at the same level and as such care should be given to tailor make the instruction to the individual.

For investors and traders to thrive they need to see things operate in a live market environment. It is one thing to learn about a strategy, an indicator, or concept of trading but quite another to see it in play. The old adage or not being able to teach someone to ride a bicycle at a seminar comes to mind.

We believe in supporting each of these critical concepts in an effort to empower our clients. We cannot guarantee profits, but we can give our commitment to educating, sharing our knowledge, and putting the control back in the hands of our investors and traders.

If you enjoyed this, check out our web site and learn more about the Easy-EMini Trading Course  http://www.easy-emini.com/

Futures trading involves substantial risk and is not suitable for all investors

Futures Margins Explained

Leverage refers to the practice of applying small amounts of margin capital to purchase or control larger blocks of an asset for the purpose of magnifying the potential return on investment.




Traditional investors are accustomed to thinking of margin as an interest-bearing loan from their brokerage firm. In the futures industry, margin is not a loan but a cash deposit--a good faith bond whereby the customer places on deposit the required cash to indicate a willingness and ability to perform on the futures contract in the event that the position is not offset. Unlike stock margin accounts, future's margin is not subject to interest charges.





The Mathematics of Leverage



As a futures contract rises or falls, the unit price of movement is amplified by the degree of leverage inherent in the contract. To understand how an investor can potentially achieve higher returns due to leverage review the following example.



Example:
A futures investor is buying (1) Corn contract at an entry price of $2.00 and selling the contract at an exit price of $2.10. The inherent leverage in a corn contract produces a return of 83% on the trade. Here is how it works.



Contract Size Price Margin Price Change Change

1 Corn Contract 5,000 Bushels 2.00 $600 10 cents $50 per point





In this hypothetical example, the futures investor deposits $600 in initial margin funds to control a $10,000 contract of corn at the current price of $2.00. If the price moves up 10 cents the inherent leverage will produce high net profit returns.



Buy at 2.00

Sell at 2.10

Profit 10 points x $50 = $500

Net Profit (before commissions) of 500 ÷ 600 (margin) = 83% return



Investors must remember, leverage is a double-edge sword. Losses can also be amplified to the same degree as gains. As leverage is increased so is risk. The same price movement in the opposite direction would produce a comparable loss. Therefore it is critical that alternative investors understand risk, before implementing a futures trading strategy.
 
Futures trading involves substantial risk and are not suitable for all investors

Using Volume to Improve your E Mini Futures Trading

Like starting your day with a good breakfast, or at least a nice cup of coffee, you need to start your trading day off good as well. In my opinion, one thing that is imperative is to understand what is happening with trading volume during the session. In the end, all futures traders, whether they are trading E Mini S&P’s, gold or bonds, want consistency. The enemy of any trader is the choppy or whip-saw price action that can destroy hard-earned equity.


Take a look at this short video and see how volume may make a difference. See an example of how to home in on what may be the best time of the day to trade futures .



Futures trading involves substantial risk and is not suitable for all investors

Simple Trading Tip with a Potential Big Payoff

New traders need all the help they can get. The tip I am about to offer is simple, cheap and in my opinion one to the keys to the possibility of having a profitable E Mini futures trading career. First, I have a quick story.


I was invited to play in a Texas Hold’em poker tournament and wanted to practice some techniques that I had studied up on. I when on line and set up a demo account at Full Tilt Poker to try it out. They have many different types or variations of Texas Hold’em but I wanted to try as many techniques as possible so I began with a speed play game. In this game, you can be in or out in seconds and over the course of an hour you could play in forty games or more. I began trying to deploy some of the rules and techniques that I had read from some online courses. I had some winning hands but ultimately, I lost track of which rules I was suppose to follow. The problem was that I was not keeping track of what worked and what didn’t. If I was dealt a certain hand and stayed in the game, what was the result?

KEY TRADER TIP: Get and maintain a trading journal

I am assuming at this point you have probably done some research, maybe even began trading e mini futures or some other market. Hopefully, you have a trading plan. As such it is critical that you document what it is that leads to your successes or failures. The more you learn about what happened, the faster you can position yourself for possible success. Make screen shots of the chart you were using, take copious notes on why you did a particular action, create a score sheet so you can keep track of everything. Keep in mind that you can begin with a demo version of most trading platforms to not only try out the platform, but your ideas as well. My firm uses Trade Center Pro which comes with a free two-week demo. Either in a demo or your live account keep good records!

Trading is kind of like cooking. You are attempting to create a great dish. In coming up with this dish, there are many ingredients and temperatures at which they are cooked. Imagine a chef assembling and trying out various concepts but never writing anything down, so when it came time to duplicate it, there is only a memory, not records.

Futures trading involves substantial risk and is not suitable for all investors

Not Enough Gold to Go Around?

Gold futures continue to break records and set new highs. While conquering the “how high is high enough” questions I thought I would interject some old school supply and demand numbers into the conversation. According to an article on Bloomberg from May 24, 2010, exchange-traded products like gold futures, backed by bullion added 41.7 metric tons in the week ending May 14 which is the most in 14 months (UBS AG data). Compare that to the weekly output from China, Australia, and the 15 other largest mining nations at 41.6 tons that the researchers from GFMS Ltd estimate.




To me, this helps build a case for $1,500 per ounce gold futures. Further, I feel more comfortable with a bullish forecast with underpinnings of a waning supply picture cast against a healthy demand picture. So often the talk about gold is about speculators, the crisis with the Euro, the crisis with Greece, or the ever-present poor global economy, but never about gold old fashioned supply and demand. Granted, one week of supply and demand numbers do not a full econometric model make, but it is one nice puzzle piece to consider.



Also from the Bloomberg article is the forecast from Evan Smith, who helps manage the $2 billion U.S. Global Investors, Inc. in San Antonio and in 2006 correctly predicted that gold would reach $700 within two years thinks “You could see gold go up another $1,000” because of “All the of the turmoil and problems we’ve seen in Europe and is just another reminder that there’s a lot of value in gold as a safe haven.”