Gold glitters, even as prices flutter
WHILE the outlook for gold remains dismal this year, following a 28 per cent tumble in prices last year, there's still glitter to be found in the metal.
But rather than investing in physical gold, one could consider taking advantage of the bearish situation by short selling gold futures.
For the uninitiated, gold futures involve buyers and sellers agreeing by contract to move a quantity of gold at a pre-determined price, with delivery and payment to be made at a later date.
In a short-selling position, one does not own the gold futures at the time of the contract but will acquire them later, in the belief that prices will fall.
Take this hypothetical example: If the gold price is US$1,200 (S$1,534) currently, and a speculator feels that this will slide further, he can short sell at US$1,200 first.
Should gold prices dip below this level, he can subsequently buy the futures at the price at which they have fallen and make a profit at delivery.
The flipside, however, is that if the market picks up and prices increase instead, the seller will have to buy the gold futures at a higher price, thus incurring a loss.
A gold-futures contract typically lasts for two months, and may be rolled over.
Mr Simon Teo, strategist and private-client service manager at Phillip Futures, said gold prices are inversely related to the strength of the US dollar.
Several factors, such as the Federal Reserve tapering quantitative-easing measures and the raising of the debt ceiling, are expected to boost the greenback.
Gold thus has the "potential for more downside in the first half of this year", Mr Teo explained.
He projects prices to drop another 10 per cent from the current levels to around US$1,050. "I won't advise investors to buy gold now, but the beauty of gold futures is the ability to short sell," he added.
Besides presenting an opportunity for speculators, short selling is a good way to hedge against falling gold prices, for those who hold physical quantities of the metal. Such strategies are adopted by jewellers and goldsmiths.
There are, however, pros and cons to speculating in gold futures.
The most discernible advantage is the smaller capital required to start, because of the use of margins. A speculator generally needs to place a minimum deposit of only 7 per cent.
For example, to buy or sell 100 ounces of gold priced at US$120,000, one needs only $8,400.
But this leverage is a double-edged sword. While the deposit amount is just 7 per cent, one is liable for the losses incurred on the entire US$120,000 - which can be a hefty amount.
Investing conservatively and with a timeline is essential.
Mr Teo said gold prices typicalyl fluctuate between 2.5 and 4 per cent a day, so for short-term trading, a 7 per cent margin may be sufficient.
But if an investor plans to hold a position longer, from between one and six months, he recommends a margin of 20 per cent to provide a "buffer against the volatility".
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