One of the world’s most popular assets is gold. Its notable track record has proven this precious metal’s value time and again. Investing in gold can be made part of a longstanding strategy or used for short-term speculation.
If you require an inflation hedge, an analytical play, a commercial hedge, or a substitute investment class, you can find a viable way to meet your requirements with futures contracts in gold and silver. However, you should keep in mind that there are substantial risks involved in trading in this market and you could lose more than you originally invested.
Gold futures is a contract in which two parties agree to trade a specific amount of gold in the future, but at the price it is currently at. In the contract, the quality and quantity of the traded gold and delivery date, among other things, are specified. The only thing that is omitted in the contract is the price as it refers to the current market price of physical gold.
If you are looking to trade in gold futures, you need to think about which exchanges you need to utilize. Here are the do’s and don’ts of gold futures trading.
- Buy standardized contract – In a standardized contract, the contract amount, the delivery conditions, the settlement date, etc. is decided by the exchange. When you buy a couple of these standard contracts, you can make up your overall investment size.
- Find a futures broker – If you are considering dealing in gold futures, it is important that you find a futures broker. The broker will provide you with help in managing your relationship with the market, and contact you on the central clearer’s behalf, for instance, to collect margin from you. This will help you trade gold futures successfully.
- Invest in long-term holdings – It is important to keep in mind that investments in precious metals should be long-term holdings. Many investors change strategies when one does not yield the desired results. However, you should give your strategy some time and budget your capital, energy, and time wisely. Selling and buying all the time could be construed as gambling, not investing.
- Do not think that ETFs and physical gold are the same – Many investors, those who are new to precious metal investments, in particular, make the mistake of thinking that owning ETFs and physical gold are one and the same. This is a mistake that you should avoid.
- Do not fall for confiscation scare tactics – The “confiscation myth” has been presented to numerous investors who found themselves being upsold into expensive, unnecessary numismatic coins without knowing it. Remember that you should only buy numismatic coins if you are a speculator or collector.
- Do not trade without research – When it comes to the precious metals market, there is a lot of significant information that you need to learn about. This means that you also need to sift through the misinformation. You should make sure that you research thoroughly before trading futures gold contracts.
A member of the CME Group, the COMEX exposes a number of commodities, focusing on metals. 100 troy ounces are represented in the standard gold contract, while 50 ounces and 10 ounces respectively, are represented by the mini and micro contracts. You should note that traders who wish to play the metal in that regard also have the option of gold volatility futures.
These contracts have a benefit and that is that trading goes on from Sunday to Friday between the hours of 6:00 p.m. and 5:15 p.m. (CST). This means that investors have approximately 23 hours a day to make a play (each day has a 45-minute break period).
London Metal Exchange
With the London Metal Exchange (LME), forwards curve data for gold are provided to any investor who has an interest in signing up. Investors will be able to see one-week forward curves as well as one to 18 months forward. This gives you a great view on the metal in the long-term.
Multi-Commodity Exchange (MCX)
This Indian exchange offers a variety of contracts for gold, including standard gold (1kg), gold guinea (8 grams), gold petal (one gram), and gold mini (100 grams) contracts. If you have a smaller capital base, the MCX may be the exchange best suited for you.
Gold Trading Strategies
When futures contracts are concerned, you need to keep in mind that when you play gold, a considerable amount of attention is required and only the most active of traders should be left to it. There can be a significant effect on your investment’s outcome even if you neglect your position for just an hour.
The major drivers of gold price are inflation, the actions taken by global banks and overall demand, whether it is financial institutions or instruments. Finally, you should keep in mind that as a primary trading instrument, the market developing trends and the behavior of the majority of traders can also change the prices of gold. Also, you should remember that the trend is your ally.
If you choose to shy away from actual futures contracts, you still have trading options available to you. Perhaps using the SPDR Gold Trust, the second largest ETF in the world, is the best alternative to owning the contracts. As an investor, the iShares COMEX Gold Trust (IAU) is another option you can look at. It is also physically backed but for investment, you are charged 15 basis points less.
Calculate Profit and Loss with Futures Prices
The way prices are quoted is one of the major differences between stock trading and futures. In trading stocks, the quoted price is exactly what that stock’s single share would cost to buy or sell in cents and dollars. In futures trading, it is completely different, which is why investors new to futures trading can get confused.
When you look at futures prices, it is the price of actual commodity futures product you are actually looking at. For futures markets like gold, this can be quite simple. If a price quote of 1,201.4 for the August 2015 Gold futures contract is what you were looking at, the price per ounce of gold for the August 2015 futures contract is $1,201.40. As you can see, the final ‘zero’ in the price quoted above is dropped from the price quote as prices of gold futures trade in 10 cent increments.