If you are looking for a hedge against inflation, a speculative play, an alternative investment class or a commercial hedge, gold and silver futures contracts might fit the bill.
In this article, we'll cover the basics of gold and silver futures contracts and how they are traded. Trading in this market involves substantial risk, and investors could lose more than they originally invested. A precious metals futures contract is a legally binding agreement for delivery of gold or silver in the future at an agreed-upon price. The contracts are standardized by a futures exchange as to quantity, quality, time and place of delivery.
Only the price is variable. Hedgers use these contracts as a way to manage their price risk on an expected purchase or sale of the physical metal. They also provide speculators with an opportunity to participate in the markets without any physical backing. There are two different positions that can be taken: The great majority of futures contracts are offset prior to the delivery date. For example, this occurs when an investor with a long position initiates a short position in the same contract, effectively eliminating the original long position.
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Because they trade at centralized exchanges , trading futures contracts offers more financial leverage , flexibility and financial integrity than trading the commodities themselves. Financial leverage is the ability to trade and manage a high market value product with a fraction of the total value. Trading futures contracts is done with performance margin. It requires considerably less capital than the physical market.
For example, one futures contract for gold controls troy ounces , or one brick of gold. The dollar value of this contract is times the market price for one ounce of gold. In the futures markets, it is just as easy to initiate a short position as a long position, giving participants a great amount of flexibility. This flexibility provides hedgers with an ability to protect their physical positions and for speculators to take positions based on market expectations.
The exchange acts as a buyer to every seller and vice versa, decreasing the risk should either party default on its responsibilities.
There are a few different gold contracts traded on U. There is a troy-ounce contract that is traded at both exchanges and a mini contract The "big" contract is for 5, ounces, which is traded at both exchanges, while the eCBOT has a mini for 1, ounces. Gold is traded in dollars and cents per ounce.
The minimum price movement or tick size is 10 cents. The market may have a wide range, but it must move in increments of at least 10 cents. These vaults are subject to change by the exchange. The most active months traded according to volume and open interest are February, April, June, August, October and December. To maintain an orderly market , the exchanges will set position limits.
A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators. Silver is traded in dollars and cents per ounce like gold. The market may not trade in a smaller increment, but it can trade larger multiples, like pennies. The most active months for delivery according to volume and open interests are March, May, July, September and December.
The primary function of any futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future.
The metal futures market helps hedgers reduce the risk associated with adverse price movements in the cash market. Examples of hedgers include bank vaults, mines, manufacturers and jewelers. Hedgers take a position in the market that is the opposite of their physical position. Due to the price correlation between futures and the spot market , a gain in one market can offset the losses in the other. For example, a jeweler who is fearful that she will pay higher prices for gold or silver would then buy a contract to lock in a guaranteed price.
Unlike hedgers, speculators have no interest in taking delivery, but instead try to profit by assuming market risk. Speculators include individual investors, hedge funds or commodity trading advisors. Speculators come in all shapes and sizes and can be in the market for different periods of time. Those who are in and out of the market frequently in a session are called scalpers. A day trader holds a position for longer than a scalper does, but usually not overnight. A position trader holds for multiple sessions.
All speculators need to be aware that if a market moves in the opposite direction, the position can result in losses. Whether you are a hedger or a speculator, remember that trading involves substantial risk and is not suitable for everyone. Although there can be significant profits for those who get involved in trading futures on gold and silver, remember that futures trading is best left to traders who have the expertise needed to succeed in these markets. Dictionary Term Of The Day.
A reduction in the ownership percentage of a share of stock caused by the issuance Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance.
Become a day trader. Futures Contract Specifications There are a few different gold contracts traded on U. Gold Futures Gold is traded in dollars and cents per ounce. Silver Futures Silver is traded in dollars and cents per ounce like gold. Like gold, the delivery requirements for both exchanges specify vaults in the New York area. Silver, like gold, also has position limits set by the exchanges. Hedgers and Speculators in the Futures Market The primary function of any futures market is to provide a centralized marketplace for those who have an interest in buying or selling physical commodities at some time in the future.
The Bottom Line Whether you are a hedger or a speculator, remember that trading involves substantial risk and is not suitable for everyone. A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur A conflict of interest inherent in any relationship where one party is expected to act in another's best interests.
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