Futures and options
Gold futures contracts are binding commitments to make or take delivery of a specified quantity and purity of gold, on a prescribed date, at an agreed price. The initial margin - or cash deposit paid to the broker - is only a fraction of the price of the gold underlying the contract.
That means investors can significantly leverage their investment. This can yield significant trading profits, and it can also cause equally significant losses in the event of an adverse movement in the gold price.
The key determining factor in futures prices is the market's perception of what the carrying costs ought to be at a given time. These include the interest cost of borrowing gold plus insurance and storage charges. The gold futures price is usually higher than the gold spot price.
Traders deal in futures contracts on regulated commodity exchanges. The largest of these is the New York Mercantile Exchange Comex Division (recently rebranded CME Globex, after a merger between Chicago Mercantile Exchange and NYMEX), the Chicago Board of Trade (part of CME) and the Tokyo Commodity Exchange. Gold futures also feature on exchanges in India and Dubai.
Tradable commodity indices, which are based on commodity futures, all include a small allocation to gold.
If you would like to find out more about gold futures, The Commodity Futures Trading Commission offers extensive reports on derivatives trading in the US.
These give the holder the right, but not the obligation, to buy ('call' option) or sell ('put' option) a specified quantity of gold, at a predetermined price, by an agreed date. The cost of such an option depends on a number of factors, including the current spot price of gold, interest rates, anticipated or implied volatility, time to expiry, and of course the pre-agreed or 'strike price'.
A higher strike price will attract a less expensive call option and a more expensive put option.
Like futures contracts, buying gold options can give the holder substantial leverage. Conveniently, where the strike price is not achieved, there is no obligation to exercise the option. That means the holder's loss is limited only to the premium paid for the option.
Like shares, both futures and options can be traded through brokers.