Gold Futures Trading Basics

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Gold Futures Trading Basics

Gold futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of gold (eg. 100 troy ounces) at a predetermined price on a future delivery date.

Some Facts about Gold

Gold is a soft, dense, shiny and highly attractive bright yellow metal. Since thousands of years ago, gold has been used to fashion ornaments and jewelry. Gold is also the ultimate store of value. Buying gold as an anti-inflation hedge is the primary use of gold today. [Click here to learn more about Gold and it’s other uses. ]

Gold Futures Exchanges

You can trade Gold futures at New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

NYMEX Gold futures prices are quoted in dollars and cents per ounce and are traded in lot sizes of 100 troy ounces .

TOCOM Gold futures are traded in units of 1000 grams (32.15 troy ounces) and contract prices are quoted in yen per gram.

Exchange & Product Name Symbol Contract Size Initial Margin
NYMEX Gold Futures
(Price Quotes)
GC 100 troy ounces
(Full Contract Spec)
USD 4,302 (approx. 5%)
(Latest Margin Info)
TOCOM Gold Futures
(Price Quotes)
1000 grams
(Full Contract Spec)
JPY 135,000 (approx. 5%)
(Latest Margin Info)

Gold Futures Trading Basics

Consumers and producers of gold can manage gold price risk by purchasing and selling gold futures. Gold producers can employ a short hedge to lock in a selling price for the gold they produce while businesses that require gold can utilize a long hedge to secure a purchase price for the commodity they need.

Gold futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable gold price movement. Speculators buy gold futures when they believe that gold prices will go up. Conversely, they will sell gold futures when they think that gold prices will fall.

Learn More About Gold Futures & Options Trading

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Know About Gold Futures

Gold, as a commodity occupies a very important place in the hearts and minds of billions across the globe, with countries and individuals stocking up on this precious resource in a bid to secure their future. Today, it can be purchased and traded through different mediums at different gold rates, ensuring that one doesn’t have to physically store this precious metal. Gold Futures are one such popular way to indulge in gold trade, and while this term might not ring a bell for everyone, it is fast gaining pace in the country.

What are Gold Futures?

A future, in simple words, refers to a trading scheme in which a commodity is up for trade, with the amount decided presently but a settlement scheduled for a future date, i.e. the agreement is entered into but the gold will be given only on the future date. Gold Futures refers to a deal in which an individual agrees to take delivery of gold at a mutually decided upon date by making an initial payment, with the complete payment to be made as per an agreement. This trade is based on speculation, with an element of risk involved.

Example: Miss Rita has a keen interest in owning gold and decides to invest a portion of her savings in it. She chooses to buy 10 grams of gold from the futures market at an agreed price of Rs 5,600, with the delivery scheduled for August, four months from now. The current price of 1 gram gold is Rs 5,650 and when she takes delivery of the gold the price is Rs 5,675, thereby helping her save Rs 75 at current rates.

Advantages of investing in Gold Futures

Some of the major advantages of Gold Futures are mentioned below.

  • It eliminates the need for immediate storage, as a buyer will not have to worry about finding secure storage facilities to store the gold.
  • Participating in this trade involves lower amounts, as a buyer can pay a certain amount at the time of making a deal and the remaining on signing the agreement.
  • There is considerable liquidity on offer.
  • There is a provision to short sell.

Risks associated with Gold Futures

Some of the risks associated with gold futures are mentioned below.

  • Default risk is a very real phenomenon, which can leave an individual in the lurch during trade.
  • Gold prices can fluctuate and it is possible for an investor to lose money on his/her investment if prices drop significantly from the time of signing an agreement and taking delivery.
  • Gold futures can be volatile and there is a chance for markets to crash or go through a phase of instability.

Gold Futures Expiry

An important aspect to consider before opting for Gold Futures is that these are dated instrument which have an expiry date. These commodities stop trading before their agreed upon settlement date is reached. All dealings will be suspended before the settlement date, ensuring individuals have adequate time to figure out their current position.

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