How To Trade Gold Futures

Since the dawn of human civilisation, gold has played a variety of important economic roles. The yellow metal has been utilised as specie, as a store of wealth and as a preferred artistic medium—functions that all contribute to its intrinsic value.

In the world of finance, gold bullion has established itself as the benchmark of the precious metals asset class. As a result, tradable bullion is offered to the public via the futures market, forex, physical gold brokers and a multitude of gold ETFs. For active derivatives participants, gold futures trading is a premier way of mitigating periods of high-risk and pursuing profitability.

What Are Gold Futures?

Gold futures are commodity-based derivatives products that furnish traders and investors with direct exposure to the world's bullion markets. Each gold futures contract is standardised with regards to quantity, quality, pricing, expiration and settlement procedure. Accordingly, traders are able to buy or sell gold while applying leverage free of counterparty risk.

One year after the Bretton Woods global monetary system was abandoned (1972)[1], the first gold futures contract was launched by the Commodity Exchange Inc. (COMEX).

Mergers And Acquisitions

In the decades that followed, the popularity of COMEX gold futures generated vast interest from more prominent exchanges. As a result, a series of mergers and acquisitions ensued:

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  • In 1994, the COMEX and New York Mercantile Exchange (NYMEX) merged. When the pairing became official, the COMEX and NYMEX became two divisions of NYMEX Holdings Inc. It wasn't until November 2006 that NYMEX Holdings listed on the New York Stock Exchange under the symbol NMX.[2]
  • In 2008, owners of the Chicago Mercantile Exchange, the CME Group, acquired NYMEX Holdings Ltd. for US$9.4 billion.[3] With the purchase, the CME Group became the world's principal venue to trade gold futures and crude oil futures.
  • Following the 2008 acquisition of NYMEX Holdings, the CME Group lauded the deal's potential upsides: "In addition to the expected cost efficiency and revenue enhancements, the combined company will be able to further distribute NYMEX benchmark products and expand OTC [over-the-counter] energy trading opportunities."[4]

When the merger finished, the CME Group became an exclusive purveyor of gold options and futures via the CME Globex electronic futures exchange. Since that time, institutional and retail metals traders alike have spurred dramatic growth in the bullion futures trade, which now accounts for nearly 27 millions ounces daily.[5]

CME Gold Futures

Gold futures provide traders and investors with a way to sell or buy gold without having to store, insure or transport the yellow metal. Over the years, the CME Group has evolved the act of trading gold futures in many ways. Perhaps the most important CME innovation is the creation of multiple contracts: full-sized, E-mini and E-micro gold futures. Of the three, the full-sized and micro offerings furnish traders with consistent volatility and liquid market conditions.

CME Full-Sized Gold Futures

The CME full-sized gold contract is the world's benchmark for the value of bullion. It trades with optimal liquidity and consistent volatility, two attributes exceedingly attractive to active traders. Below is a brief look at the contract specifications:[6]

  • Market: CME Globex
  • Symbol: GC
  • Size: 100 troy ounces
  • Denomination: US dollars and cents per troy ounce
  • Tick Size: US$0.10 per troy ounce
  • Tick Value: US$10.00 per tick
  • Future Date Listings: Monthly contracts listed for 3 consecutive months February, April, August, and October in the nearest months and June and December in the nearest 72 months
  • Settlement: Physical delivery
  • Delivery Date: May be delivered after expiration, from the first to last business day of the delivery month.
  • Quality: Delivery of gold must adhere to a minimum of 995 fineness

CME Micro Gold Futures

At 1/10th the size of the GC contract (10 troy ounces of gold), CME micro gold futures present retail traders with a smaller, less capital intensive way of trading bullion. The result is reduced stress on the trading account and an ability to implement a variety of long, medium or short-term trading strategies.

Below are the official CME contract specs:

  • Market: CME Globex
  • Symbol: MGC
  • Size: 10 troy ounces
  • Denomination: US dollars and cents per troy ounce
  • Tick Size: US$0.10 per troy ounce
  • Tick Value: US$1.00 per tick
  • Future Date Listings: Monthly contracts listed for any February, April, June, August, October, and December in the nearest 24 months
  • Settlement: Deliverable
  • Delivery Date: May be delivered after expiration, from the first to last business day of the delivery month.
  • Quality: Must adhere to a minimum of 995 fineness

How To Trade Gold Futures

One of the best things about being a modern trader are the low barriers to entry of the financial markets. No matter if one is trading forex, futures, or shares, getting involved is straightforward. In the case of futures, there are only a few prerequisites that need to be met:

Essentials

An internet connection, computing power (desktop, laptop, or mobile) and risk capital are must-haves to trade gold futures.

Futures Brokerage Account

If you're going to get involved with futures and futures options trading, then opening a brokerage account will be necessary. A futures broker extends margin (for gold, around 4% of the notional value of the contract[8]), provides market access, and facilitates client transactions. Unless you own or lease a seat directly from the exchange, opening a futures position in the live market is impossible without brokerage services.

Trading Platform

Whether you are trading fundamentals or technicals, you'll need a software suite to trade gold futures. With a trading platform, you can chart pricing data, apply analytics and place send orders to the exchange.

All you need to begin trading gold futures is an internet connection, computing power, brokerage account, software and risk capital. After securing these assets, you can sell or buy gold futures nearly 24 hours a day, six days per week.

Gold Market Drivers

At its core, gold is an earth-borne raw material and is technically classified as a commodity. Consequently, the yellow metal is subject to an array of commodity-oriented market drivers. If you're going to trade gold, then it's imperative that you understand how supply and demand, market uncertainty and currency inflation can prompt price fluctuations.

Supply & Demand

Perhaps the greatest underpinning of the commodity markets is the evolving relationship between supply and demand. Generally, commodity prices increase as demand outpaces supply and fall when supply exceeds demand.

For gold, the supply/demand dichotomy is complex. It relies greatly on the combination of exploration, mining production and institutional participation. To illustrate this dynamic, let's take a look at the COVID-19 pandemic.

During the first half of 2020, an estimated 10 to 15% of the world's gold mines were offline due to COVID-19 lockdowns.[9] Also, banks, governments and large investors began stockpiling bullion to hedge risks posed by the pandemic. Given the supply disruption and growing demand, the price of gold reached record highs above US$2000 per troy ounce in August 2020.[10]

Market Uncertainty

Gold's inherent utility, scarcity and popularity make it one of the world's premier safe-haven assets. Contemporary finance reinforces this categorisation, because everyone from retail traders to central bankers attempt to protect their wealth by increasing exposure to the yellow metal.

Traditionally, savvy traders and investors look to manage the high-risk attributed to uncertainty by implementing a variety of strategies. A few of the most common are the acquisition of physical gold, day trading GC futures and buying gold ETFs. As a result of increased safe-haven demand, the futures and spot price movements of bullion are typically bullish during periods of capital market angst.

US Dollar (USD) Inflation

Another key commodity market driver is the relative strength of the US dollar (USD). As a general rule, the prices of raw materials are positioned to rise as fiat currencies become devalued. This is an intuitive point as periods of inflation undermine purchasing power, thus more money is needed to acquire physical assets.

As a bonafide safe-haven, gold is a popular hedge against inflation. During the inflationary spike of spring 2021, the spot price of bullion rose 9.9% (1 March 2021 to 31 May 2021)[11] as investors moved to preserve their wealth. The CME December 2021 gold contract echoed the bullish sentiment, as evidenced by GC futures prices rallying by 9.3% (1 March 2021 to 31 May 2021).[12] Given the coronavirus-inspired economic environment of near-zero interest rates and massive government stimulus, countless investors sought protection from inflation via bullion.

Summary

Gold is a benchmark of the precious metals sector and basis for multiple CME Group futures products. Among the CME's featured listings are the full-sized (GC) and micro gold futures (MGC) contracts. Both are available for electronic trade on the CME Globex digital exchange.

If you're going to trade gold futures, you'll need capital, a futures brokerage service and trading platform. Also, it's important to monitor the price of gold with respect to supply and demand, uncertainty and currency inflation. Regardless if you are a stock market specialist or forex trader, trading gold can be a viable way of pursuing profits or managing high-risk financial environments.

References

1

Retrieved 27 Oct 2021 https://www.thelocal.no/20111114/the-long-history-of-gold-trading/

2

Retrieved 27 Oct 2021 https://www.financial-dictionary.info/terms/new-york-mercantile-exchange-nymex/

3

Retrieved 27 Oct 2021 https://economictimes.indiatimes.com/news/international/cme-agrees-to-acquire-nymex-for-9-4-billion/articleshow/2876063.cms

4

Retrieved 27 Oct 2021 https://www.cmegroup.com/media-room/press-releases/2008/3/17/cme_group_inc_toacquirenymexholdingsincontermspreviouslyannounce.html

5

Retrieved 27 Oct 2021 https://www.cmegroup.com/markets/metals/precious/gold.html

6

Retrieved 27 Oct 2021 https://www.cmegroup.com/markets/metals/precious/gold.contractSpecs.html

8

Retrieved 27 Oct 2021 https://www.cmegroup.com/markets/metals/precious/gold.margins.html

9

Retrieved 27 Oct 2021 https://investingnews.com/daily/resource-investing/precious-metals-investing/gold-investing/covid-19-gold-mine-closures/

10

Retrieved 27 Oct 2021 https://www.perthmintbullion.com/us/blog/blog/20-09-07/New_USD_record_gold_price_in_August.aspx

11

Retrieved 27 Oct 2021 https://www.fxcm.com/uk/research/forex-charts/

12

Retrieved 27 Oct 2021 https://www.cmegroup.com/apps/cmegroup/widgets/productLibs/esignal-charts.html

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