Gold and silver futures trading

There are many reasons for investing in gold and silver. Firstly, they can be a safeguard against inflation. They can also be very useful for diversifying risk in a multi-asset portfolio, especially as these metals are negatively correlated to other assets such as stock and real estate.

They are also an effective hedge against crisis situations and are, therefore, often referred to as 'safe-haven' insurances. Lastly, but certainly not least, precious metals are secure and liquid assets.

Future contracts

A future (contract) is a contract that states that the buyer has to buy and the seller has to sell a specific amount of a specific product at the pre-agreed price on a specific date in the future.

A futures contract is therefore a simple instrument derived from (the price of) the underlying value. You buy a future when you expect prices to rise and if they do you make a profit, but you suffer a loss if prices fall.

On the other hand, if you expect prices to fall, it is wise to set up a short position and sell a future short. It is not possible, however, to set up short positions on some stock exchanges, and DGCX is one of them, so it is impossible to make money in bear markets on such exchanges. This is a great pity because markets, even precious metal markets, can fall.

A bull market will eventually end and, even in an up-trend, it is possible to experience a saw-tooth profile. However, the advantage of futures is that both long and short positions can be set up very quickly and you can profit from all movement, despite its direction.

The price of gold has doubled from $325 in 2003 to more than $650 at the moment. The increase in the price of silver is even greater: this 'bling bling' product, which was recently trading at $15, was priced at $4.50 in 2003. And DGCX could profit from the price acceleration that both these metals have undergone lately.

If you are interested in investing in these products, you should not be looking for (fixed) income but for increased prices. While investments in stock can provide an income by means of dividend payments, commodities do not pay compensation for investment.

Inflation hedge

However, these products usually compensate for inflation through a rise in price. It is because of inflation that we cannot simply talk about an all-time high (price) of gold: inflation must be taken into account if we want to compare the gold price to earlier highs.

Because it is essential that you are aware of the implications of every separate asset class, I would like to remind you of this: stock prices of mining companies have risen much more than the prices of precious metals. Some of these companies (e.g. Aurelian Resources Inc, Western Goldfields Inc. and Regent Ventures Ltd, all in Canada) yielded more than 1000% profit in just one year.

If you had invested in one of these companies, you would have made far more profit than if you had invested in pure gold. It is therefore essential that investors not only predict which asset classes are likely to show the best performance, but also know how best to profit from that performance.