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In case of gold future trading, the price of the gold being bought and sold is decided on one date, but the payment or delivery is made on a future settlement date. There is no delivery of the gold or the payment to be made on the spot, but they buyer may have make a part payment. The settlement date, usually three months ahead, is the day on which the actual delivery of the gold and payment of the balance amount is made.
This method of delaying is beneficial to both the buyer and the seller, as it encourages speculation regarding the future price of gold. Instead of settling the entire amount of the deal, only the amount of profit or loss is settled on the settlement date, and any one party surely benefits. It is also possible to deal in larger amounts of gold in such gold future trading, as only a small portion of the amount is required towards payment. Additionally, the possibility of greater profits is also there.
The future gold trade relies on a margin being paid up by the buyer. This is a kind of safeguard for both the buyer and the seller. If the price of gold falls on the settlement date, the buyer might walk away on the deal. On the other hand, if the price of gold climbs up on the settlement date, the seller might come out of the commitment. To prevent this, a margin amount has to be paid by the buyer.
A down payment is made by the buyer at a central place or site and it helps in making both parties adhere to the deal either way on the settlement day. This margin is only about 2 to 20% of the total amount of the deal or the gold being purchased.
Gold trade done in the futures way is beneficial, as the trading can be done in larger amounts. For instance, if you have $10,000 for the purpose of investment, you can buy only that much worth of gold in the usual form of investing. In gold future trading you could invest up to $100,000 or more, as you need to make only a 2% payment, which is $2000 alone.
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