Gold Futures 101: Getting to Know Gold Futures
Gold has long been used as an investment. Investing in physical gold; either gold coins or gold bullions, has been a popular choice for many people, especially as a hedge during troubled times. Now there is another way you can invest in the gold market: gold futures.
What Is Gold Futures?
Gold futures is a contract between two parties to trade a certain amount of gold at a future date but at the current price. The contract specifies, among other things, the quantity and quality of the traded gold as well as delivery date. The only thing that is left out of the contract is the price as it refers to the current physical gold market price.
Where Is Gold Futures Traded?
In the US, gold futures is traded at Chicago Mercantile Exchange (CME). Elsewhere, gold futures is traded at Multi Commodity Exchange in India and Shanghai Futures Exchange in China.
Why Trade Gold Futures?
1. No Inventory
As with other futures trading, neither the seller nor the buyer has the physical gold in hand. Instead, both parties are trading the equivalent value of physical gold on a piece of paper. Thus trading gold futures allows you to trade gold without having to possess a single ounce of it. This is achieved by selling or buying the gold futures contract before the settlement date.
More importantly, trading gold futures allows you to trade a large amount of gold with only a fraction of the total value. This allows you to gain large amount of profits with a low starting cost than buying the physical gold itself. Just bear in mind that your chance to lose big is high as well.
The example below shows how leverage works for you when trading gold futures:
1 futures contract of gold = 100 troy ounces of physical gold
Hypothetical price of 1 ounce of physical gold = $1,000
Value of 1 futures contract of gold = $100,000 (100 ounces x $1,000)
If the margin required to control one gold futures contract is $10,000, then with $10,000 you are able to control $100,000 worth of physical gold! It’s like spending $1 to get $10 profit.
You can check the current margin of gold futures here.
Gold futures is also used as a hedging tool especially for commercial producers and users of gold such as jewelers. By trading gold futures they are able to manage their price risk on an expected purchase or sale of the physical metal.
Whether you are looking for profits or as a protection against inflation, trading gold futures may help you achieve your goal. Just remember that futures trading involves substantial risk and is not suitable for everyone. Know your market, have the essential knowledge and trade with the money you can avoid to lose.
Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.
Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.
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