Lower levels of consumer confidence, a decline in the dollar, the risk of inflation and continued uncertainty about U.S. economic recovery lead investors into traditional safe-havens, such as gold. Weakness in the dollar tends to support commodities denominated in dollars — inflation decreases the dollar’s buying power.
Gold gives you a traditional hedge against inflation and a widely accepted store of wealth in an uncertain economic environment. You can either add gold to your portfolio of investments by buying gold futures or use gold futures to speculate on changes in the value of gold relative to fiat currencies like the U.S. dollar. Let’s go through the basics of gold futures and how to use them to your benefit.
Table of ContentsUnderstanding futures makes it easier to know how gold futures work. There are many types of futures — gold is just one type. Gold futures follow some of the same rules as many other futures contracts.
Futures are legally binding contracts between a buyer and seller to exchange some commodity or financial instrument at some point in the future. Although the last trading day of the contract is known as its expiration day, the exchange is actually made at a later date (the settlement day), but the buyer and seller of a contract agree on the price today.
You can generally recognize futures by their expiration month. For example, trading in the CME Group’s gold futures contracts expires and settlement occurs on the 3rd last business day of the contract month.
These contracts have a physical settlement type — available for delivery on any business day starting on the first business day of the delivery month until the last business day of the delivery month.
CME Group’s gold futures contracts are generally available for three consecutive months and then on a quarterly schedule expiring in March, June, September and December. For example, a September contract on gold expires in September, and a December contract expires in December. Do not confuse futures with options — futures are an obligation to buy or sell. With options, you have a choice of whether to execute the contract or not on its expiration day.
Gold futures are specifically made for speculators and hedgers to buy and sell gold. If you buy a December futures contract on gold, you are obligating yourself to take possession of 100 troy ounces of gold at the per ounce price of the contract on the contract’s expiration date in late December. The seller can either deliver the contracted 100 ounces of physical gold or offset his position by buying back the futures contract.
Very few gold futures contracts ever end in settlement by delivery. The futures contract seller typically covers a short futures position at a profit if the price of gold has declined — and takes a cash loss if the price has risen.
If you buy a gold futures contract, you will most likely have to either roll your position into the next month or sell your long futures contract since delivery of gold is at the future sellers’ discretion, not the buyer’s. You’ll probably never be able to take delivery of the physical commodity by using a gold futures contract. If you expect to buy a contract and take delivery of the physical gold, you must have all of the funds available for the 100 ounces per contract, apply with the exchange and follow a certain procedure to be able to take delivery.
The value of the gold futures contract will rise and fall with gold price fluctuations. You can take your profit or loss, depending on the price of gold when you decide to close the contract out on or before the future’s expiration date.
Most futures brokers will not even allow you to take physical delivery because they do not have the appropriate infrastructure to store and deliver it to you securely. Brokers will state that they do not assign and will close out your position for you just before expiration for a fee.
If you want to purchase a futures contract, the easiest and safest way to do so is through a regulated futures broker. Take a look at the choices below. Some brokers have their own trading software, while some still allow trading over the phone.