Understanding Gold Futures Trading

Trading gold futures does not involve gold to exchange hands. A gold future refers to an agreement by the buyer to buy a specific quantity of gold at a pre-determined price at a future time. Gold futures are the best way to gain leveraged exposure but are volatile. Gold futures are a fascinating and important realm, but they do not deserve the level of mysticism and fear they seem to generate. The futures priesthood that ‘informs’ gold-stock operators often takes events out of context and disseminates half truths planned to sway sentiment.

Gold’s importance in world markets make COMEX Division gold futures and options an essential risk management tool for commercial investors. Investors watch Comex contracts as an indicator of froth in the market. Trading gold futures securities happens primarily on paper: most of the gold purchased or sold in the futures market never moves. Gold futures are typically negotiated by “speculators,” traders who purchase or sell gold futures but aren’t interested in the physical gold, versus “hedgers,” who do value the gold itself as an investment. Trading gold futures also has low commissions.

Gold options are also powerful and cost-effective investing instruments, which can be used to own desired quantity of gold in future, and can also be used to hedge price changes of gold that you hold. Every futures contract is for 100 troy ounces.

Prices in a structured derivatives market mirror the perception of market participants concerning the future and lead the prices of underlying to the alleged future level. The prices of derivatives join with prices of the underlying at the conclusion of the derivative contract. Prices fluctuate based on supply and demand (although the twice-daily gold fix in London aids set a reference point for prices). The price of gold in the spot gold market-called the “spot price”-is the price fixed for the spot gold, including delivery, to be paid two days following the date of the actual deal.

In closing, let me emphasize again that gold futures are not a risk free financial commodity and should be considered judiciously. Investments should only be made with risk assets which is money you could afford to lose and it would not cause you to change your standard of living in any manner.

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