Wednesday, February 29th, 2012
Auckland – The reported official investigation into a bullion trading company this week highlights the risk to investors in buying gold futures or ‘paper gold’, says Auckland gold merchant MyGold. Futures trading is simply speculating on the price of a commodity going up or down in the future and investors seldom actually hold the physical commodity, just a piece of paper known as a futures contract.

Richard Elliott, head bullion trader at MyGold, an independent gold and silver merchant, says, “It’s important to consider the security of your investment in precious metals. Gold is gold and paper is paper. Understand that if you can’t touch it, you don’t own it. Events of the past week show the difficulty for someone buying certificates or trading ‘paper gold’ in enforcing their rights if the person retaining the gold doesn’t actually have it, or refuses to pay.”

Leveraged trading also has significant risks when prices suddenly move against the investor, requiring a ‘margin call’ to make up the difference. If investors cannot provide additional capital it’s likely that their ‘paper gold’ will be sold at a significant cost.
For example, using a conservative leverage ratio of 5:1, means it’s possible to purchase $25,000 of paper gold bullion with just $5,000. If the gold price moves down 7%, that $5,000 is now worth $3,236, a 35% percent loss in value. There are also the costs of leasing fees, administration charges, storages fees and commissions to pay. The price of gold, like any traded commodity, can move quickly when large volumes hit the market. In May 2011, the price of silver dropped 30 percent in one week, following moves by large investors. Consider that some brokers will offer a credit ratio of 500:1 and it is obvious how investors can face huge losses in a short space of time.

Gold has been known throughout history as a safe haven during troubled times and financial uncertainty in Europe is underpinning the current bull run for the physical product.

Mr Elliott says, “The safest way of owning gold and silver is to buy the physical product, without leverage, and hold it in a secure location that you control, ideally in a safe country like New Zealand. My advice to investors in light of the events of this week is not to be pressured into complicated schemes or fancy products, or over extend yourself through excessive leverage.

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