What are Gold Futures?

- May 9th, 2019

For those interested in the gold sector, gold futures can be a rewarding investment. Learn how to leverage this opportunity.

For investors looking to step into the precious metals space via gold, there are a number of ways to invest in the yellow metal market. One way is through gold futures, which is a common strategy among many commodities, including precious metals.

Putting it simply, futures are a financial contract between an investor and a seller. The investor agrees to purchase an asset from the seller at an agreed-upon price based on a date set in the future.

In 1972, the Chicago Mercantile Exchange launched futures trading in seven currencies, but it wasn’t until 1974 that the first gold futures contract was traded on the COMEX exchange in New York. Since then, gold futures have continued to grow in popularity as an investment strategy on various stock markets.

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Gold futures investing

Gold futures are compelling because they give investors the opportunity to trade the commodity without having to pay the full amount right away. An agreement is made between two parties, including the spot price and weight of gold, and a delivery month — set in the future — is decided upon.

In other words, gold futures can be described as a contract in which an individual agrees to take gold at an agreed date by making an initial payment, with an agreement set in place to complete the payment.

A Daniels Trading publication notes that gold futures are offered in 100 ounces, 33.2 ounces and 10 ounces, and are an “alternative to bullion coins, mining stocks and leveraged bullion dealers.”

Where they are traded

In the US, investors can buy or sell gold futures contracts on the New York Mercantile Exchange (NYMEX) in contracts of 100 troy ounces and are quoted in US dollars per ounce. For example, US$1 equals US$100 per contract, with a minimum price fluctuation of 10 cents, or US$10 per contract.

Typically, NYMEX contract months include February, April, June, August, October and December, with trading closing on the third to last business day of the delivery month.

Another place gold futures can be traded is the Tokyo Commodity Exchange, where the contract size is 1 kilogram per contract, which is approximately 32.15 troy ounces.

As of July 2017, gold and silver futures trading has been available at the London Metal Exchange. Since then the exchange has reported high volumes of futures trading.

Rewards and risks

There are rewards and risks to gold futures investing; however, they may not necessarily apply to everyone. Still, it’s important for investors to use their own discretion when making a decision.

Here are some tips for investors to keep in mind when considering this opportunity.

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Rewards of gold futures investing:

  • As mentioned, trading gold futures allows investors the flexibility of paying a certain amount when the deal is made, and then paying the remaining amount on the agreed upon date.
  • That means if investors are able to sell quickly, it’s likely they will never pay for all the gold they purchased. Rather, they will likely pay 2 percent up front, while any loss will be adjusted on a downpayment and paid back in net.
  • Tracking the worth of a futures contract is easy, simply by following along with the exchange price.
  • Investors don’t need to keep gold futures stored anywhere — at least not right away.

Risks of gold futures investing:

  • The gold futures market can be volatile, which means there is the possibility for collapse.
  • On that note, the gold price is constantly fluctuating. This means that an investor may lose money if there is a large drop in the price from the time their agreement is made to the date of delivery.
  • Similarly, gold futures have a “built in” price differential, which can skew their true value. For example, if an investor signs a futures contract at US$1.50 above the gold price 30 days before closing, its value will drop approximately US$0.05 per day until the closing date.
  • Default risk — which means someone may be entitled to a profit but can’t collect it.

Why gold futures?

There are high rewards and high risks with gold futures investing, meaning they are certainly not for everyone. That being said, CME Group notes that they “provide global gold price discovery and opportunities for portfolio diversification.”

CME Group further adds that there are ongoing trading opportunities associated with gold futures, and says they are an alternative investment opportunity from stocks, coins and gold bullion.

Would you invest in gold futures or in other commodity futures? Let us know in the comments below.


Want more details? Check out these articles for more INNdepth coverage.

Want and overview of investing in gold stocks? Check An Overview of Gold Stocks and Price.

This is an updated version of an article first published by the Investing News Network in 2016.

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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.

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