Gold is bought as the ultimate defensive investment. Many people buying gold hope to make large profits from a global economic shock which might be disastrous to many other people. Indeed many gold investors fear financial meltdown occurring as a result of the over-extended global credit base - a significant part of which is derivatives. There are many speculators involved in the commodities market and any rapid movement in the gold price is likely to be reflecting financial carnage somewhere else.
Both the clearer and the exchange could theoretically find themselves unable to collect vital margin on open positions of all kinds of commodities, so a gold investor might make enormous book profits which could not be paid as busted participants defaulted in such numbers that individual clearers and even the exchange itself were unable to make good the losses.
This sounds like panic-mongering, but it is an important commercial consideration. It is inevitable that the commodity exchange which comes to dominate through good times and healthy markets will be the one which offers the most competitive margin credit terms to brokers. To be attractive the brokers must pass on this generosity to their customers - i. So the level of credit extended in a futures market will tend to the maximum which has been safe in the recent past, and any exchange which set itself up more cautiously will have already withered and died.
The futures exchanges we see around us today are those whose appetite for risk has most accurately trodden the fine line between aggressive risk taking and occasional appropriate caution. There is no guarantee that the next management step will not be just a bit too brave.
Succeeding in the futures market is not easy. To be successful you need strong nerves and sound judgement. Investors should recognise that futures are at their best for market professionals and short term speculations in anticipation of big moves, which diminsh the effects of contango and rollover costs.
The investor should understand that there are problems when a market loses its transparency. Once a market can apply costs which are opaque and difficult to comprehend - and surely the futures market qualifies in this regard - the advantage shifts to professionals who are sophisticated enough to see through the fog. Many individuals who have tried their luck in this market have been surprised at the speed at which their money has gone.
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Charts Gold price Silver price Platinum price Price alerts. Guide to gold. Gold Futures. Topping up the Margin If you have bought and the gold price starts falling you will be obliged to pay more margin. Gold Leverage Now you can see how futures provide leverage , sometimes known as gearing. Gold Futures 'On-Exchange' Big professional traders invent the contractual terms of their futures trading on an ad-hoc basis and trade directly with each other. Dealing standard contracts on a financial futures exchange will give you two big advantages:- Firstly there will be deeper liquidity than with an OTC future - enabling you to sell your future when you like, and to anybody else.
That is not usually possible with an OTC future. Secondly there will be a central clearer who will guarantee the trade against default. The central clearer is responsible among other things for looking after margin calculations and collecting and holding the margin for both the buyer and the seller. Futures expire Note that gold futures are dated instruments which cease trading before their declared settlement date. Dealing Gold Futures To deal gold futures you need to find yourself a futures broker.
Hidden Financing Costs It sometimes appears to unsophisticated investors and to futures salesmen that buying gold futures saves you the cost of financing a gold purchase, because you only have to fund the margin - not the whole purchase. Because both gold and cash can be lent and borrowed the relationship between the futures and the spot price is a simple arithmetical one which can be understood as follows: "My future purchase of gold for dollars delays me having to pay a known quantity of dollars for a known quantity of gold.
The Stop-Loss Many futures broking firms offer investors a stop loss facility. Gold Futures Rollover There is an acute psychological pressure involved in owning gold futures for a long time. Rollover Costs Each quarter a futures investor receives an inevitable call from the broker who offers to roll the customer into the new futures period for a special reduced rate. Running To Settlement The professionals often aim to settle - a luxury not always available to the private investor.
Automatic Instability Futures markets have structural features which are not natural in markets. Risk of Systemic Failure Gold is bought as the ultimate defensive investment. Gold Futures - Summary Succeeding in the futures market is not easy. Open an account Try out buying and selling with a free sample. Transfer funds Make a bank transfer to your BullionVault account. Buy gold, silver or platinum In your choice of vault through the live order board. Validate your account Upload photo ID and bank statement.
Email support BullionVault. Save your cookie preferences. Please select an option below and 'Save' your preferences. No cookies. Without any cookies our websites can't remember your site preferences currency, weight units, markets, referrer, etc. 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.
This is a troy-ounce contract. The contracts are for 5, ounces, and are traded at both exchanges. Gold is traded in dollars and cents per ounce. 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.
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 , the 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 is traded in dollars and cents per ounce like gold.
Like gold, the delivery requirements 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. 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 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. 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.
CME Group. Accessed Feb. NYSE Liffe. Metals Trading. Soft Commodities Trading. It is important to keep in mind that investing in these gold ETF platforms does not allow investors to own any physical gold — even a gold ETF that tracks physical gold generally cannot be redeemed for actual gold. Alternatively, ETFs that invest in gold companies provide exposure to gold-mining, development and exploration stocks, as well as gold-streaming stocks.
Many market participants invest in gold futures because in contrast to ETFs, futures are straightforward. Investors are able to buy or sell gold at their discretion without management fees, and taxes are split between short-term and long-term capital gains. Another place gold futures can be traded is the Tokyo Commodity Exchange, where the contract size is 1 kilogram per contract, which is approximately As of July , gold and silver futures trading have been available at the London Metal Exchange.
The contract size for LME gold futures is fine troy ounces. There are high rewards and high risks with gold futures investing, meaning they are certainly not for everyone. CME Group further adds that there are ongoing trading opportunities associated with gold futures, and says they are an alternative investment opportunity from stocks, coins and gold bullion.
Would you invest in gold futures or in other commodity futures? Let us know in the comments below. This is an updated version of an article first published by the Investing News Network in Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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