What are Gold futures?

There are several categories that investment products are classified as:
Financial and non-financial resources, financial resources can be separated into market-linked products like stocks
and mutual funds
Non-financial assets, a preferred option for investors such as gold and real estate, a further breakdown will lead us to
investment avenues such as Gold Exchange Traded Funds (ETF) and “Gold Futures”.

Why invest in Gold?

 It has been observed that investing in Gold is one the safest options for the following reasons in-spite of
recessions and market crashes
 A volatile stock market or real estate will always remain a source of discomfort for even the most secure and
confident investors.
 Gold is contrariwise correlated to the stock market
 The physical supply of Gold equated with demand outweighs the world's Gold reserves. Gold mining is a
strenuous project for any gold explorers/miners to bring new mines into production and to find new gold
deposits.

What if the investor does not want to or cannot afford to invest in the physical product itself ?

The options available are:

 Gold Futures.

 Gold Exchange-Traded-funds (ETF)

What is Gold Futures?

Gold futures are bonds that are transacted on exchanges in which a purchaser agrees to purchase a
specific quantity of the Gold at a mutually determined price and a set "future' date

Many financiers will utilize hedging practices for “futures” contracts as a way to manage and curtail the
price risk associated with precious metal commodities. Investors may and can use “futures” contracts to
take part in the market without any physical backup.

Investors can take adaptive positions namely long and short positions on futures contracts. In a long
position, the investor buys gold with the expectation that the price will rise. The investor is obligated to
take delivery of the metal. In a short position, the investor sells the commodity but intends to cover it later
at a lower price.

Since the trading is done on exchanges, “futures” contracts provide investors with more
financial influence, with more latitude to function, and financial reliability than trading with the real physical
commodities.

Gold futures, in comparison to ETFs, are forthright. Investors can buy/sell gold as and when desired.
There are no administration fees, taxes are subjected to short-term and long-term capital gains, there are
no outside stakeholders making decisions on the investor's behalf, and at any time investors can own the
purchased gold. Finally, because of margin, every $1 that's put up in gold futures can represent $20 or
more in physical Gold.
Gold “futures” agreements can offer a hedge or protective insurance against inflation, an alternative
investment avenue for investors seeking prospects outside the usual equity and fixed income deposit
schemes.

What Are Gold Futures Contracts?

A Gold “futures” contract is a legal obligatory agreement for the delivery of gold or silver at a predetermined price in
the future. A futures exchange regulates the agreement respective of quantity, value, time, and delivery destination.
Only the price is flexible.

Hedgers use these contracts as a protective document in event of an expected purchase or sale of the physical
metal. Futures also provide risk-takers with an opportunity to participate in the markets without any physical backing.

Two different positions can be adapted: a long (buy) position is a commitment to accept delivery of the physical
metal, while a short (sell) position is the commitment to deliver. The great majority of futures contracts are “offset”
before the delivery date. For example, this occurs when an investor with a “long position” opts for a short position in
the transitory stage of the contract, thereby abolishing the original “long position”.

Futures Contract Specifications.

There are a few different gold contracts traded on U.S. exchanges:

One at COMEX and the other at eCBOT. Both exchanges trade in a 100-troy-ounce contract and a mini contract of 33.2 troy-
ounces is traded only at eCBOT.

Gold Futures.

Gold, the unit of trade is in dollars and cents per ounce. For example, when gold is trading at $400/ounce, the
contract has a value of $40,000 ($400 x 100 ounces).
An investor that is “long” at $400 and sells at $410 will make $1,000 ($410 - $400 = $10 profit; $10 x 100 ounces =
$1,000). Contrariwise, an investor who is long at $400 and sells at $390 will lose $1,000.

For example, one futures contract for gold controls 100 troy ounces or one brick of gold (27.4 lbs).

The dollar worth of this contract is 100 folds the advertised rate for one ounce of gold.
If the market is trading at $400 per ounce, the value of the contract is $40,000 ($400 x 100 ounces). Based on
exchange margin rules, the margin required to control one contract is only $4,050. So for $4,050, one can control
$40,000 worth of gold. As an investor, this gives you the capability to manipulate $1 to regulate roughly $15.

In the futures markets, it is convenient to adopt a short or long position, giving participants a great amount of
flexibility. This flexibility enables hedgers to safeguard their physical positions and for speculators to take positions
subject to market expectations. The minimum price movement tick is 10 cents. The market may offer a wider range,
but it must operate in increments of 10 cents.
Both eCBOT and COMEX ensure delivery is specific to New York area vaults. The vaults as specified are subjective
to change by the exchange.
The most active trading months concerning volume and open interest are February, April, June, August, October, and
December.

To maintain a regulated market, these exchanges will set position limits.

A “position limit “is the maximum number of contracts a single investor will maintain. There are variable position limits
for hedgers and speculators.
Advantages of Gold Futures Contracts.

Trading futures contracts/agreements offer more financial control and financial reliability than trading the
commodities/metals themselves because trading is done at centralized exchanges.

 Financial modulation to trade and control a high market value product with a minimum total value. The
trading of futures contracts is a performance margin stipulated, which requires significantly less capital than
the physical market. Modulation and control provide speculators with a higher risk/higher return investment
option. Gold futures exchanges offer no correlated party risks to participants ensured by the concerned
exchanges.
 The exchange can be a buyer to every seller and vice versa, decreasing the risk should either party fails to
honor its commitment Financiers interested to add gold and silver to their portfolio may feel safe to
experiment with ‘futures” contracts.
 The investor may not need to be in physical possession of the metal and can control the purchasing power
too.
 Holding futures requires zero service fees and taxes are split between short and long-term capital gains.
 The investor will, however, need to roll “futures” positions over as they expire, otherwise expect the physical
commodity to be delivered.

Disadvantages of Gold Futures contracts.

 Gold appears to have no revenue
 Large amounts of Gold bullion requires storage fees and related logistic issues
 Like shares, Gold can be unstable on a short-term basis

Summary.
To succeed in the Futures market is not easy and an investor must be prepared and equipped to face the
unknown or take services of a financial consultant before venturing into the market.

Reference:

https://www.investopedia.com/articles/exchangetradedfunds/08/gold-etf-gold-futures-showdown.asp