What are Gold Futures?

What Are Gold Futures?

Like all commodity futures, gold futures are derivative financial contracts.  A derivative is a type of contract whose value is determined by or derived from the value of another asset.  In the case of gold futures contracts, the other asset is an amount of gold.  The major gold futures contracts traded on the CME Group’s COMEX Exchange are derived from the value of 100 ounces, 50 ounces, and 10 ounces of gold with a rated fineness of 995. What this means is the underlying metal’s purity is at least 99.5% or more.  In turn, because of the reflective relationship between gold futures contracts and gold itself, understandably the price of a futures contract is valued similarly to and fluctuates with the price of gold.

The Marketplace Breakdown

Gold futures, such as those traded on the CME Group’s COMEX Exchange, are an efficient means for you as a trader to participate in the directional movement of the price of gold.  The exchange is essentially the marketplace where these futures are traded.  By means of electronic networks, an exchange’s market participants can be apprised of vital information like this futures contract’s current price, competing bids and offers, the number of contracts changing hands (volume), the total number of outstanding contracts (open interest), and more.  It’s also the means by which participation in the gold futures marketplace takes place.  It’s where buyers and sellers, or futures traders like you, meet.

How Do You Begin Trading This Market?

Gaining access to the gold futures market generally calls for a trading account to be opened with a registered brokerage.  It is through this arrangement that market participation is facilitated and orders to buy and sell gold futures can be placed to the exchange via an electronic trading platform – called Globex at the CME.  The exchange is responsible for the execution of trades between buyers and sellers.  This is possibly the most important function of the exchange, in that it serves as the buyer to every seller and the seller to every buyer, thus virtually eliminating credit risk for each market participant.

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Author: Mark O’Brien, Senior Broker at Cannon Trading Company

Important: Trading commodity futures and options involves a substantial risk of loss. Therefore, recommendations contained in this letter are of opinion only and do not guarantee any profits. There is not an actual account trading these recommendations and past performances are not necessarily indicative of future results.