Gold Future

Gold has once again proved to be resistant to economic adversity. In fact, prices of gold have spurted rather sharply in the last three years. Though gold is sold everywhere in form of coins, jewelry, bars, etc, international trading is almost confined to London Metal Exchange, and the New York Mercantile Exchange's COMEX division.

There are many bullion banks listed at these exchanges and the trader or investor can purchase the futures and options from these banks provided he or she has a personal account with the bank. Alternately, the investor may approach a broker active on any of these two exchanges.

Unlike foreign currency markets, gold is not traded 24/7. There are specific trading months and timings when gold, including gold futures and gold options, are sold at these exchanges. For example in COMEX division, online trading starts each Sunday at 6.00 pm, and lasts till 5.15 pm of the Friday following this Sunday. There is, of course a 45 minutes gap from 5.15 PM to 6.00 PM each day. This is as per Eastern Time. Open outcry trading, which is the traditional form of trading, is also possible here. The timing for this would be between 8.20 a.m. and 1.30 p.m. each day. Again the time mentioned here is as per Eastern Time. There are stipulations relating to months when the trader or investor has to deliver or take delivery of gold, based on the contract. Some of these are specifically applicable to gold futures and options. It is a bit difficult to understand them in the beginning, but over a period, the person gets habituated to the system.

Futures contracts are here to stay. These are fairly new way of trading in any stocks, currency, bullion, or commodities. Futures enable a person to invest or sell at a future date, deciding on sale price today. The concept is new but has caught the fancy of all traders. More so, because there is a special type of derivative contract called options with future concept integrated in it. Options offer excellent way to earn profits with minimum risks. Technology is another reason for popularity of futures market. It is possible to keep a record, analyze, predict, and speculate in real time with the available software and hardware. CME Globex® trading platform is an online trading system facilitating buying and selling of gold on COMEX division.

Gold futures are like any other futures – contracts to purchase or sell gold in future. Each futures contract is for 100 troy ounces. Therefore when a person enters a futures contract for one unit, he has agreed to buy or sell as the case may, 100 troy ounces of gold with each unit for which he contracts. When the price changes, it is recorded at $0.10 per troy ounce. Since each futures trade relates to 100 troy ounces, or multiples thereof, the variation can be in $10 for every contract. Gold options traded in COMEX division vary as per the strike price. If the strike price is less than $500, then the option can be exercised at $10 per ounce more or less. This interval increases with the strike price.

There are charts of Gold futures and options available on net, which indicate in which direction the prices of metal are likely to move. In this context, it is important to understand what is long, short, put, call and open interest. Open interest means the number of futures and options deals that have not yet been used. Long means purchasing in future, at a specific strike price, anticipating that the price of gold would cover the strike price, as well as cost of purchasing the futures or options contract, and commissions, if any. Short means selling gold now that is not in possession, on expectation that in future gold prices would be south bound. Therefore, a short transaction, unless covered, implies a buy order in future. Put is an option to sell gold in future, at a specified price, while call is an option to purchase gold in future at the strike price. Settlement days are defined by exchanges. All the deals of a particular duration are squared off, and only those that are eligible are carried forward to the next trading session. These are the terms in charts and graphs of gold futures and options, and therefore, they need to be understood by anybody who intends to play in this market.