Gold Futures

The gold futures market allows you to buy and sell contracts in gold, dated at some point in the future. These futures contracts can be traded on the New York Commodities Exchange (COMEX), which is now a part of the Chicago Mercantile Exchange (CME). A gold futures contract can be traded by institutional investors or commodity speculators, and is a standardized agreement to deliver or receive a specified quantity of gold at a pre-determined date for an agreed price. COMEX gold futures contracts are for delivery of 100 troy ounces of pure gold.

These contracts can be acquired by a trader wishing to go long or to go short on the underlying asset. This means a position can be taken where the hope is that the gold futures price will increase (long) or decrease (short) over the time period to expiration of the contract. So for example, if the trader goes long, he is effectively buying gold today in the hope that its price rises and can then benefit from the price rise. Conversely, taking a 'short' position means he sells gold, with a view to it falling in price over time, and then buying at the lower price to close out the deal. In this latter case, the trader 'buys low and sells high', but in reverse.

To a degree, trading Gold futures can be like crystal ball gazing. The market participants are effectively guessing - or anticipating - where the underlying asset price is heading, and likely to be once the contract reaches expiration, and investing accordingly. The futures price needs to take account of the interest rate, because of the lost opportunity cost in investing in contracts, rather than taking a safer position in cash with a bank. The futures price needs to factor in this opportunity cost, which is done by the market itself. However, since interest rates are so low at the moment, and therefore only play a small part in the price, we can ignore this interest rate impact, for now.

Although gold futures contracts are based on the eventual delivery of physical gold, the majority of contracts are closed before expiration. In other words, it is very rare that the underlying commodity is actually delivered as a result of trading in the futures market. Usually, most gold transfers occur electronically with the physical gold remaining in secure vaults in protected banks and other institutions. When a client does take delivery of the underlying, he normally gets a warrant for gold from the clearing depository.