Are You Ready to Gamble?

First off, I want to make it clear that I am not heckling the following article. I think it is pretty good.

Are You Ready To Trade Futures?

Many people begin trading without fully understanding the fundamentals of the contract. Futures trading is a zero-sum game. For each trade there is a winner and a loser.

That alone should tell you that you better know a lot more than the next guy if you are interested in futures trading. I am not interested. I assume I know no more than the next guy. The last thing I want to do is go head to head with a computer algorithm running in some large investment bank that's being tweaked by PhD's in mathematics. I might win, but I would tend to bet against me.

When you trade futures for their own sake, it is like playing in a casino. The floor traders, futures exchanges and a few experienced traders with deep pockets win in the long term. Most other traders end up losing their capital and leave poorer and disappointed.

That's exactly what I don't want to do.

For example, the contract size for gold futures is 100 ounces. That means when you are buying one contract of gold, you are really controlling 100 ounces of gold. If the price of gold moves $1 higher an ounce, that will affect the position by $100 ($1 x 100 ounces).

That's a fascinating example on so many levels. I've been trying since 2004 to avoid leverage in any way that I can.

For those who think they have avoided leverage by buying physical gold, there might be a slight flaw in the logic.

I personally avoided leverage with real estate. I owed nothing on my home when the real estate bubble popped. That did not mean that my home's price was immune when the leverage of others was unwound though.

If you are buying gold as an inflation hedge (even at these prices), then you might want to consider buying extra basic necessities first (toilet paper and canned goods come to mind), then buy gold with the remaining money. What's the harm?

If you are buying gold because you think it will go up in price much faster than inflation and therefore see it as a money making opportunity, then I would consider that to be a form of gambling. You have to ask yourself how many others might be doing that exact same thing.

Gold is too expensive for me these days. I was fortunate to have picked some of the lowest lying fruit from that tree in 2004. As of 2006, I no longer own gold. I clearly could have done better had I continued to hold it, but I cannot complain about the ride. In any event, right or wrong, I'm done.

I should also mention that I thought gold was overpriced when it hit $1000 and stated so on this blog. I thought toilet paper would outperform it. I've been wrong on that so far but I do continue to believe it. Time will tell.