The advantages of trading gold futures over ETFs

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NinjaTrader Blog

“Gold is arguably the most widely observed and diverse raw material in the world,” says the CME Institute. While gold-specific ETFs like GLD and IAU offer traders a way to participate in this market, gold futures are a more efficient and cheaper way to trade gold.

The COMEX is operated by the CME and offers 2 different futures contracts for gold trading:

  • Gold Futures (GC) is the world’s leading benchmark gold futures contract that offers traders and investors consistently high levels of liquidity.
  • Micro Gold Futures (MGC) offer a smaller contract size for active traders who want to participate in the physical gold market with less financial commitment.

Learn more about the benefits of trading gold futures in this 4-minute video!

7 advantages of trading gold over ETFs

  1. Leverage: A gold futures trader has about 15x leverage on a gold contract, or in other words, $ 1 is leveraged to control about $ 15 worth of gold. This is much greater leverage than even the most aggressive gold ETFs and offers 3x leverage at best. *
  2. liquidity: The average daily dollar volume in GC futures is $ 52 billion, 54 times the average daily turnover of the SPDR Gold ETF in the fourth quarter of 2019. With such high liquidity in the gold futures market, traders can position positions in both Getting on and off directions with ease.
  3. No fees: There are no management fees for gold futures that are charged to a gold ETF position on each day the position is held.
  4. No additional corporate risk: ETFs that replicate gold may face additional business risks that are independent of gold value. For example, the SPDR Gold Trust can be liquidated if the net asset value falls below $ 50 million, regardless of the strength of the gold market. Trading gold futures does not involve such company-specific risks.
  5. Almost 24-hour access: Gold futures are traded almost 24 hours a day, 6 days a week, making it a popular and sought-after futures instrument around the world. Compared to regular stock exchange trading of 6.5 hours, 5 days a week, gold futures offer more trading options and the ability to manage positions at any time of the day.
  6. Tax benefits for gold futures: While gold ETF holdings are treated as “collectible” and are subject to high capital gains tax, gains and losses from gold futures are taxed according to the 60/40 rule (60% long-term capital gains rate, 40% ordinary income tax rate).
  7. Low initial margin: The initial margin for trading gold futures can be up to 3% of the contract value. In contrast, the margin on gold ETFs can exceed 50% on top of broker financing fees.

* Please Note: Financial leverage can result in losses in excess of the initial margin and traders should be aware of the risks associated with trading futures.

The above chart, made 100% FREE with NinjaTrader, shows 3 months of price action in gold futures at a daily interval. A volume weighted moving average (VWMA) has been added for additional analysis.

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