Gold futures and how they work

Gold futures contracts are traded on the exchanges where the legally binding contract purchaser agrees to accept delivery, coming from the seller, a precise amount of gold (e.g., 100 troy ounces) at the pre-specified price on the foreseeable future delivery date. Although they seem like a foreign asset to trade, the truth on how gold futures work is very simple. You lock in the price of the commodity now and buy it at a particular time in the future.

Gold futuresIf you follow the price of gold, you will see that it moves not in a straight line but fluctuate on a day-to-day basis. This is a good or a bad thing depending on what your interests are in gold. If you are a jeweler, you will want to buy a futures contract for gold, so you can buy it cheaper when the price closes higher on the date stated in the contract. On the other hand, that you are an investor, you want to take advantage of the price now and hope that the price of gold will rise so that you earn profits.

Gold futures trading basics

Choosing gold futures contract to trade, you can do so at the different exchanges in the United States, including COMEX and eCBOT. Take note, though; futures trading is a risky investment, and you should only trade it if you're skilled and have the expertise essential to be successful in it. But if you want to trade even when you are new, just know that there are many resources out there that can help you.

Unlike the forex markets and binary options, you will not find a lot of brokers that offer futures contracts. Just what exactly you should do is to call  COMEX or eCBOT and ask for a list of qualified brokers that are allowed to trade in the exchanges.

Just like forex trading, futures contracts are leveraged, however, the leverage is not the high unlike forex where you can do leveraged trades $1=$400. With futures, you can do leveraged trades $1:$15. However, because the price of gold typically moves up and down by dollars and not by cents, you can make money with a small amount upfront. 

A typical futures contract goes this way: you buy a contact for one brick of gold or 100 troy ounces. The value of gold in this contract is 100 times the market value for the same amount of gold. If gold is trading at $600 per ounce, the contract’s value is at $60,000 or $600 x 100 ounces. Because you are trading on margin, you will only need $4,050 to control $60,000 worth of gold. 

If the price of gold moves up by $10 at the time expiration of the contract, you win and earn $1,000, that is, if you are a speculator and frequently move in and out of the markets. But if you are a jeweler, one still win because you locked in the price of gold and one won’t need to spend as much money for the same amount of gold. 

In conclusion

The general public, as well as producers of gold, can control gold price risk by buying and also selling gold futures. Gold providers may use a short hedge that will secure a selling price level for the gold they will produce whilst companies that need gold might employ a long hedge to secure a purchase price towards the product they want.

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