How to Buy Gold Futures

How to Buy Gold Futures Contracts

Knowing how to buy gold futures and other precious metals like silver and platinum are excellent ways to diversify your portfolio. Precious metals are rare, naturally occurring metallic chemical elements of high economic value. For example, adding securities uncorrelated with stocks and bonds smooths out market fluctuations. This is important because they’ll reduce your risk over the long term and boost your returns. 

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Luckily, there are multiple ways to invest in Gold, and one way, in particular, is via. Gold futures. In this article, I’ll explain how to buy gold futures. And because we’re in a tumultuous market, the timing of this article couldn’t be any better. 

Gold is a yellow-toned precious metal used for everything from medical procedures, electrical contact, and money to jewelry and so much more. If you were sleeping through chemistry in school, Gold is a transition metal that sits in the same periodic table column as silver and copper. This group is frequently called the “coinage metal” group as they’re used to produce money.

With origins dating back to 3400 BCE by the Egyptians, Gold is, in fact, one of the first metals known to man. But, beyond even that, it has always been a symbol of wealth and beauty. 

Interestingly enough, Egyptians would amass tremendous amounts of Gold to adorn the coffin of a dead Pharaoh during the reign of Pharaohs. Take, for example, the death of King Tut. His coffin contained around 247 lbs of Gold!

5-Minute Takeaway

  • Futures contracts are the primary way to trade Gold. 
  • Gold futures prices move in $10 increments; every movement point will either be a $10 loss or gain.
  • Gold contracts trade mainly on the OTC London market, the U.S. futures market COMEX and the Shanghai Gold Exchange. 
  • Most contracts are liquidated before the delivery date.
  • Futures are complex instruments with a high risk of losing money rapidly due to leverage.
How to Buy Gold Futures Contracts

What Does Gold Cost?

That depends. Are you looking to buy physical Gold, or are you hoping to profit off the future price of Gold in a so-called futures contract? 

First, let us begin with some layperson’s terms so we can all agree.

Physical Gold, the Gold you can hold or wear on your hand, refers to gold bullion. More often than not, its format is in a .999 fine gold coin or gold bullion bar. Yet, we also have highly traded modern 22k gold coins. Some commonly traded gold coins amongst gold bullion buyers include the 22k American Gold Eagle Coins and the 22k South African Gold Krugerrand Coins.

The price of theoretical fine Gold is delivered right now. Gold futures contracts with the most trading volume determine it.

You’ll see live gold spot prices quoted in real-time if you go on any website of all online gold bullion dealers. Typically, the prices quoted for purchase and delivery are per troy ounce of Gold. 

What Are Futures?

A commodity futures option gives the purchaser the right to buy or sell a particular futures contract at a future date for a specific price. The future date is also called the delivery date, while the pre-set price is called the futures price. Finally, we call the underlying asset’s price on the delivery date the settlement price. 

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Advantages of Trading Futures Contracts

There are several potential benefits of investing and trading in futures:

  • Money can be made from “call” or “put” contracts.
  • Fantastic liquidity with trading close to 24 hours a day, six days a week.
  • Gold futures contracts typically are sold at a fraction of the price of physical Gold.

That’s all good, but trading futures contract poses several risks, including the following:

  • Since futures contracts are leveraged, your risk is magnified exponentially. 
  • Trading futures contracts may result in unlimited losses greater than the amount you deposited with your broker. 
  • Even when unprofitable, futures contracts require execution. 
  • Under some market conditions, hedging or liquidating a position can be hard or impossible.

Gold Futures Contracts Basics

Futures contracts are the primary way to trade Gold. Gold futures contract traders buy or sell gold futures contracts on worldwide futures exchanges. Although often not physically exchanging any real-world commodity, gold futures contract trading ‘price discovery’ determines fluctuations in gold spot prices in various currencies worldwide, including the full fiat U.S. dollar gold spot price.

Gold futures contracts are exchange-traded contracts that allow investors like you and me to hedge or speculate on the future price of Gold.  

Like all other futures contracts, you, as the buyer, agree to take delivery of the quantity of Gold you purchased from the seller at a specific date and price.

Gold futures contracts allow investors and traders to invest in Gold without taking physical possession of it. Moreover, one can buy and sell quickly with practically 24 hours per day of trading and superior liquidity. 

Your profit or loss from a futures contract would depend on the price difference between what you bought the contract and the price you sold it. 

Since gold futures prices move in $10 increments, every movement point will either be a $10 loss or gain. 

Gold Leverage: A Real Life Example

Futures provide leverage, commonly referred to as gearing. Humor me for a minute and say that you have 

 $5,000 to invest. If you buy physical gold bullion and settle, you can only buy $5,000 worth. 

But here is where things get interesting. 

You can probably buy $100,000 worth of Gold (futures) with gold futures contracts! That’s because your margin on a $100,000 future will probably be around 5% or $5,000.

If the underlying price of Gold goes up 10%, that’s a profit of $500 from the bullion. But a staggering $10,000 from the gold futures.

The Downside

This sounds fine and dandy, but there’s always the flip side. For example, what happens if the price of Gold drops 10%? If you bought physical bullion, you’re only out $500, but you still own the physical asset.

The outlook isn’t so bright with gold futures. 

Sadly, the same 10% fall will cost you $10,000 if you invest in gold futures. Do the math, and you’ll see that’s $5,000 more than you invested in the first place. 

Your broker likely will convince you to deposit the extra $5,000 as a margin top-up. And the pain of a $10,000 loss will force you to close your position, so your money is lost.

When You Refuse to Top Up Your Account

If you refuse to top up your margin, you will be closed out by your broker, losing your original $ 5,000 on a minor intra-day adjustment. 

For these reasons, you can see how dangerous futures can be. Most people who trade futures lose their money if they don’t invest in the proper education and training. Conversely, Bullish Bears have a comprehensive future training course, so this doesn’t have to be you. 

Manufactures Use Gold Futures

Most investors and traders buy and sell gold futures contracts before they expire, so they don’t have to take physical possession of the Gold. 

However, I will now turn to an example where a futures contract is not exercised before expiration. Remember, we have manufacturers that use physical Gold in their products. Take, for example, your fancy gold engagement ring or necklace. So, of course, it only makes sense for the manufacturer to lock in the price of the Gold. 

Finding and Choosing a Broker

As an individual investor, you cannot trade directly on an exchange—security futures transactions for individual investors.

To buy gold futures, you’ll need a brokerage account that allows it. In the United States, Gold futures trade on the COMEX divisions of the New York Mercantile Exchange and ICE. As the second largest futures exchange in the U.S., ICE Futures U.S. contracts clear through ICE Clear U.S.

Good to Know

CME Group is the world’s leading derivatives marketplace, comprised of four exchanges: CME, CBOT, NYMEX, and COMEX. Each Exchange offers a wide range of global benchmarks across all major asset classes.

With limited exceptions, commodity futures and options trade through an exchange by persons (brokers) and firms registered with the Commodity Futures Trading Commission.

Most brokers are honest, competent professionals—and there are regulators, like FINRA, to help ensure that the few who aren’t are identified and disciplined. 

Before you do business with any security futures professional or firm, please do your homework and check out their background. FINRA BrokerCheck and the NFA’s Background Affiliation Status Information Center (BASIC) offer online access to important information about your broker or firm. 

These sites can provide information about the professional backgrounds, business practices, and conduct of firms and brokers. In addition, your state securities regulator may also have additional information about securities professionals.

Gold Futures Contract Size

The three Gold futures contract sizes for trading are 100, 50, and 32.15 troy ounces. However, 100 troy ounces is the standard contract size. 

Notably, though, each gold futures contract aligns with the following specifications:

  • Exchange. COMEX.
  • Contract size. 100, 50, or 32.15 troy ounces.
  • Minimum tick size and value. 0.10, at the cost of $10 per contract.
  • Trading hours. You can trade gold futures from 6 pm to 5 pm EST, Sunday through Friday. There’s a 60-minute trading break on Friday starting at 5 pm EST. No gold futures trading occurs on Saturdays.
  • Main trading months. Primary gold futures contracts are February, April, June, August, October, and December. Monthly contracts listed for three consecutive months, any Feb, Apr, Aug, Oct in the nearest 23 months and any Jun and Dec in the nearest 72 months

Final Thoughts: How to Buy Gold Futures

Investing in futures contracts can be rewarding but involves significantly more risk than traditional stocks and bonds. This is because you can lose a lot more than your original investment. Because of this, I highly suggest talking with a financial advisor, fee-only, in your journey to add derivatives to your portfolio. As experts in their field, they’ll explain the pros and cons of investing in derivatives. 

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