When it comes to commodity trading, the first choice of investors is gold and silver futures contracts. Many of them consider it a similar investor option, but they behave in a very different manner. Both have different risk and reward ratios.
In today’s blog post, we will give you an overview of gold and silver futures, their key differences and which is better for traders in India.
What are Gold and Silver Future Contracts?
Gold and silver futures are financial contracts in which an investor agrees to buy or sell gold or silver on a future date at a predetermined price. These are standard contracts having specific units in each contract. They are generally traded on the Multi-Commodity Exchange or MCX. One gets the benefit of the price movement of these metals and gets the benefit of the margin trading facility.
Key Features of Gold and Silver Future Contracts
The key features of Gold and Silver future contracts are as follows:
- Standard Contracts: Exchange has standardised the gold and futures contracts for trading. These contracts have a fixed lot size, defined expiry date, etc.
- Traded on the Exchange: Gold and silver futures contracts are traded on the Multi-Commodity Exchange. It operates under a regulated environment, and the exchange ensures transparency, etc.
- Margin Trading: Your broker allows you to trade in Gold and Silver futures contracts by paying only a small amount and taking advantage of the margin trading facility.
- Physical Delivery: There is an option of physical delivery of gold and silver, as contracts can be settled via physical delivery, but retail traders generally square off their position before expiry.
- Liquidity: Trading in both gold and silver contracts offers liquidity to an investor, as they are the most traded commodities in India. It allows investors to easily enter and exit a trade.
Difference between Gold and Silver Futures
The key differences between gold and silver futures are as follows:
| Particulars | Gold Futures | Silver Futures |
|---|---|---|
| Volatility | Gold futures show low to moderate volatility. | The prices of silver are more volatile than those of gold. |
| Risk | Investment in gold futures has a moderate level of risk. | Due to sharp price movement, it carries a high risk. |
| Affordability | The contract value of the gold future is higher. Hence, it requires more capital. | Silver futures have a lower contract value, hence it is more affordable for an investor. |
| Margin Requirement | It requires a higher margin. | The silver future contract requires a lower margin than the gold future contract. |
| Traders | Long-term investors generally trade gold futures to hedge their position. | Silver futures contracts are often used by aggressive traders, those who want to take advantage of short-term price movements. |
| Reasons to change the price | The price of gold fluctuates because of external factors such as demand, inflation, interest rates, etc. | The silver future prices are impacted by industrial demand, economic growth, etc. |
Read Also: How Much Gold & Silver Should You Hold in Your Portfolio?
Benefits of Trading in Gold and Silver Future Contracts
The key benefits of trading in gold and silver futures contracts are as follows
- Large Profits: Due to the margin trading facility, one can enter into large trades with a limited amount of capital, allowing them to make high profits.
- Short Positions: Along with the buy position, one gets an advantage of shorting their position if the prices of these commodities fall.
- Hedge against inflation: Gold is generally considered a hedge against inflation, whereas silver holds value over time. Traders use their futures contracts to protect against rising prices.
- No Physical Storage: Traders and investors are not required to store gold and silver in physical form. Therefore, they do not need to worry about the storage, security, and purity of gold and silver.
Risk of Trading in Gold and Silver Future Contracts
The risk of trading in Gold and Silver futures contracts is as follows:
- High Risk: Due to leverage trading in gold and silver futures, one can enter into a large contract value with a relatively small amount. On the other hand, even a small decrease in the price of gold and silver can amplify returns and lead to significant losses.
- Margin Call: If the price of gold and silver falls significantly, the broker can issue a margin call, and if you fail to deposit the required margin, your broker can forcibly square off your position.
- Global Market Risk: The prices of gold and silver are impacted by global events. Hence, the prices can change over time and can impact gold and silver prices. And it may open up a gap or a gap down.
How to invest in Gold and Silver Futures
To invest in gold and silver future one can follow the steps mentioned below:
- Visiting the website of Pocketful: An investor is required to visit the website of Pocketful and click on the Open Demat Account tab.
- Open a Demat Account: The next step is to open a lifetime free demat and trading account by providing basic details to complete your KYC.
- Login: Once your demat account is opened successfully, you will need to log in to your mobile application using the login credentials provided to you by Pocketful.
- Capital: You are required to add funds to your demat account to begin investing in gold and silver futures contracts.
- Choosing the Contract: The contract in which you wish to invest should be selected by you it can be either a gold or a silver contract.
- Buying a Future Contract: Once you choose the contract, you can purchase the future contract of gold and silver.
Which is better for the trader, Gold or Silver Futures
Gold and silver futures contracts have their own importance; the choice between them depends on the investor’s risk profile, investment objective, etc. Investors who prefer stability over returns can consider gold futures as an investment option, as their prices tend to move steadily and are impacted by factors such as interest rates and global economic conditions. Etc. Whereas, on the other hand, silver futures contracts are more suitable for traders looking for a higher return in a short period of time. Therefore, Gold future contracts are suitable for conservative investors, and silver future contracts are suitable for aggressive investors.
Read Also: Silver ETF vs Physical Silver
Conclusion
In conclusion, investing in gold and silver futures offers a unique opportunity to own precious metals. Gold futures can be used as a hedge against inflation and provide stability in one’s portfolio. On the other hand, silver futures contracts are highly volatile in nature and are suitable for aggressive investors who wish to make high returns in a short period of time. But there are various factors which can lead to a change in the prices of gold and silver, such as interest rates, demand, etc. Therefore, it is advisable to consult your investment advisor before making any investment in gold or a futures contract.
Frequently Asked Questions (FAQs)
Among gold and silver futures, which is more volatile?
Silver futures contracts are more volatile than gold futures contracts. Silver prices tend to move faster than gold.
Why is silver more volatile than gold?
Silver is more volatile than gold because it is used as an investment option, along with this, it has an industrial usage, which can cause a price change.
Can I trade in gold and silver using the margin trading facility?
Yes, one can easily trade in gold and silver futures using the margin trading facility provided by your stockbroker.
Do gold and silver future contract requires same margin?
No, gold and silver futures contracts require different margins. Gold future contract generally requires higher margin, while, on the other hand, silver futures have a relatively lower margin.
What is rollover in a gold and silver futures contract?
Rollover in a gold and a futures contract refers to a process in which a trader closes their position of the current month and purchases the next month’s contract. This process needs to be completed before the expiry of the current month’s contract.
