Gold Futures Trading Basics

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Gold Futures Trading Basics

Gold futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of gold (eg. 100 troy ounces) at a predetermined price on a future delivery date.

Some Facts about Gold

Gold is a soft, dense, shiny and highly attractive bright yellow metal. Since thousands of years ago, gold has been used to fashion ornaments and jewelry. Gold is also the ultimate store of value. Buying gold as an anti-inflation hedge is the primary use of gold today. [Click here to learn more about Gold and it’s other uses. ]

Gold Futures Exchanges

You can trade Gold futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Gold futures prices are quoted in dollars and cents per ounce and are traded in lot sizes of 100 troy ounces .

TOCOM Gold futures are traded in units of 1000 grams (32.15 troy ounces) and contract prices are quoted in yen per gram.

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Gold Futures
(Price Quotes)
GC 100 troy ounces
(Full Contract Spec)
USD 4,302 (approx. 5%)
(Latest Margin Info)
TOCOM Gold Futures
(Price Quotes)
1000 grams
(Full Contract Spec)
JPY 135,000 (approx. 5%)
(Latest Margin Info)

Gold Futures Trading Basics

Consumers and producers of gold can manage gold price risk by purchasing and selling gold futures. Gold producers can employ a short hedge to lock in a selling price for the gold they produce while businesses that require gold can utilize a long hedge to secure a purchase price for the commodity they need.

Gold futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable gold price movement. Speculators buy gold futures when they believe that gold prices will go up. Conversely, they will sell gold futures when they think that gold prices will fall.

Learn More About Gold Futures & Options Trading

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What are the basics of futures trading?

Not sure if futures trading is right for you? In this article, we’ll help you find out by taking a close look at what futures are and how they work.

What are futures?

To start, here’s a quick definition: Futures are contracts for the delivery, or cash settlement, of many things you may encounter every day, like materials, products, or even the stock market itself. But what does that really mean? Let’s break it down by exploring a few key traits that make futures unique.

All futures share the following three characteristics:

  1. Easy contract trading. Futures are contracts that trade on an exchange. That means if you buy or sell them, closing your trade is as easy as it would be for a stock. The futures market is relatively deep and liquid.
  2. Settlement by cash or physical delivery. Like stocks, most futures—including the CME E-mini S&P 500 and other equity index futures—settle in cash. There’s no exchange of physical goods or shares of stock. The only thing that changes hands is money.

However, some commodity futures, like corn and soybeans, are physically settled, meaning each party to the trade is expected to deliver or receive the actual commodity at expiration. But very few futures contracts are settled this way, and at E*TRADE, while you should be sure to close your positions on time, there are mechanisms in place to minimize this risk.

  • Backed by commodities or other assets. Futures contracts represent the pricing of essential things that affect our daily lives, including agricultural products (like wheat and cattle), energy products (like crude oil and gasoline), and financial products that facilitate international trade (e.g., those involving interest rates and currency exchange).
  • Equity index futures are one of the most popular, providing another way for investors to trade on price movement in the stock market. These include the CME E-mini S&P 500 mentioned above, plus the CME E-mini Nasdaq and CME E-mini Russell 2000.

    What are the basic terms used in futures trading?

    Now that we’ve seen what futures are, let’s explore how they work by defining and illustrating some essential futures terms.

    • Tick . Futures contract prices move in minimum increments called “ticks.” These are different for each futures product and can usually be found by checking the futures page. As an example, the CME E-mini S&P 500 has a tick size of a quarter of an index point.
    • Tick value. Unlike stocks (where each tick is worth a penny), tick size for futures is product-dependent, and as a result, the dollar value will vary. The tick value of the CME E-mini S&P 500 is $12.50, so if you buy a contract and end up selling it, say, two ticks higher, you’d make $25.00, assuming no commissions or fees.
    • Contract size. The specified quantity behind each futures contract (i.e., how much of a commodity or financial instrument is backing that contract) is called its contract size. For example, the CME gold futures contract represents 100 troy ounces of gold.
    • Notional value. Knowing the size of a futures contract enables you to determine its notional value—i.e., how much each contract is worth. You can figure this out by multiplying the contract size by the current price of the futures contract.

    Consider gold: If gold futures are trading at $1,300 per ounce and the size of the CME gold futures contract is 100 ounces, the contract’s notional value would be $130,000 ($1,300 x 100). In dollar terms, that’s how much one gold contract is worth.

    If a contract’s notional value ever seems too big for your wallet, check to see if there’s a contract with a smaller size. With gold, there is. It’s the CME E-micro gold, which has a contract size of 10 ounces—and a notional value of $13,000 ($1,300 x 10). That’s one-tenth the size of the bigger contract.

    Trading Gold and Silver Futures Contracts

    Gold and silver futures contracts can offer a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge for investors seeking opportunities outside of traditional equity and fixed income securities.

    In this article, we’ll cover the basics of gold and silver futures contracts and how they are traded, but be forewarned: trading in this market involves substantial risk, which could be a larger factor than their upside return profiles.

    Key Takeaways

    • Investors looking to add gold and silver to their portfolio may want to consider futures contracts.
    • With futures, you don’t need to actually hold physical metal and you can leverage your purchasing power.
    • Holding futures has no management fees that might be associated with ETFs or mutual funds, and taxes are split between short-term and long-term capital gains.
    • You will, however, need to roll your futures positions over as they expire, otherwise you can expect delivery of physical gold.

    What Are Precious Metals Futures Contracts?

    A precious metals futures contract is a legally binding agreement for delivery of gold or silver at an agreed-upon price in the future. A futures exchange standardizes the contracts as to the quantity, quality, time, and place of delivery. Only the price is variable.

    Hedgers use these contracts as a way to manage price risk on an expected purchase or sale of the physical metal. Futures also provide speculators with an opportunity to participate in the markets without any physical backing.

    Two different positions can be taken: a long (buy) position is an obligation to accept delivery of the physical metal, while a short (sell) position is the obligation to make delivery. The great majority of futures contracts are offset before the delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.

    Advantages of Futures Contracts

    Trading futures contracts offers more financial leverage, flexibility, and financial integrity than trading the commodities themselves because they trade at centralized exchanges.

    Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with a performance margin, which requires considerably less capital than the physical market. The leverage provides speculators with a higher risk/higher return investment profile.

    For example, one futures contract for gold controls 100 troy ounces, or one brick of gold. The dollar value of this contract is 100 times the market price for one ounce of gold. If the market is trading at $600 per ounce, the value of the contract is $60,000 ($600 x 100 ounces). Based on exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control $60,000 worth of gold. As an investor, this gives you the ability to leverage $1 to control roughly $15.

    In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations.

    Gold and silver futures exchanges offer no counterparty risks to participants; this is ensured by the exchanges’ clearing services. The exchange acts as a buyer to every seller and vice versa, decreasing the risk should either party default on its responsibilities.

    Futures Contract Specifications

    There are a few different gold contracts traded on U.S. exchanges: one at COMEX and two at eCBOT. There is a 100-troy-ounce contract that is traded at both exchanges, and a mini contract (33.2 troy ounces) traded only at eCBOT.

    Silver also has two contracts trading at eCBOT and one at COMEX. The “big” contract is for 5,000 ounces, which is traded at both exchanges, while eCBOT has a mini for 1,000 ounces.

    Gold Futures

    Gold is traded in dollars and cents per ounce. For example, when gold is trading at $600 per ounce, the contract has a value of $60,000 ($600 x 100 ounces). A trader that is long at $600 and sells at $610 will make $1,000 ($610 – $600 = $10 profit; $10 x 100 ounces = $1,000). Conversely, a trader who is long at $600 and sells at $590 will lose $1,000.

    The minimum price movement, or tick size, is 10 cents. The market may have a wide range, but it must move in increments of at least 10 cents.

    Both eCBOT and COMEX specify delivery to New York area vaults. These vaults are subject to change by the exchange. The most active months traded (according to volume and open interest) are February, April, June, August, October, and December.

    To maintain an orderly market, these exchanges will set position limits. A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators.

    Silver Futures

    Silver is traded in dollars and cents per ounce like gold. For example, if silver is trading at $10 per ounce, the “big” contract has a value of $50,000 (5,000 ounces x $10 per ounce), while the mini would be $10,000 (1,000 ounces x $10 per ounce).

    The tick size is $0.001 per ounce, which equates to $5 per big contract and $1 for the mini contract. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies.

    Like gold, the delivery requirements for both exchanges specify vaults in the New York area. The most active months for delivery (according to volume and open interests) are March, May, July, September, and December. Silver, too, has position limits set by the exchanges.

    Hedgers and Speculators in the Futures Market

    The primary function of any futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future. The metal futures market helps hedgers reduce the risk associated with adverse price movements in the cash market. Examples of hedgers include bank vaults, mines, manufacturers, and jewelers.

    Hedgers take a position in the market that is the opposite of their physical position. Due to the price correlation between futures and the spot market, a gain in one market can offset losses in the other. For example, a jeweler who is fearful that they will pay higher prices for gold or silver would then buy a contract to lock in a guaranteed price. If the market price for gold or silver goes up, they will have to pay higher prices for gold/silver.

    However, because the jeweler took a long position in the futures markets, they could have made money on the futures contract, which would offset the increase in the cost of purchasing the gold/silver. If the cash price for gold or silver and the futures prices each went down, the hedger would lose on her futures positions but would pay less when buying her gold or silver in the cash market.

    Unlike hedgers, speculators have no interest in taking delivery, but instead, try to profit by assuming market risk. Speculators include individual investors, hedge funds, or commodity trading advisors (CTAs).

    Speculators come in all shapes and sizes and can be in the market for different periods of time. Those who are in and out of the market frequently in a session are called scalpers. A day trader holds a position for longer than a scalper does, but usually not overnight. A position trader holds for multiple sessions. All speculators need to be aware that if a market moves in the opposite direction, the position can result in losses.

    The Bottom Line

    Whether you are a hedger or a speculator, it’s crucial to remember that trading involves substantial risk and is not suitable for everyone. Although there can be significant profits for those who get involved in trading futures on gold and silver, keep in mind that futures trading is best left to traders who have the expertise needed to succeed in these markets.

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