Platinum Swing Trade Alerts

The 10-Buck Broker (Long-Term Stock Picks)

Announcement

Collapse
No announcement yet.

How Does the Gold Futures Market Work?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • How Does the Gold Futures Market Work?

    There are two principle gold markets for bullion gold and silver. For the purposes of this discussion, we'll assume that the silver market functions in a similar enough manner to make an analogy from the gold market. We'll delve into the differences between the silver and gold market in a later post.

    The two primary markets that determine the price of gold are the spot market and the futures market. The spot market is the market where gold for immediate delivery trades. Despite the name, not every transaction that happens in the spot market has a physical exchange of goods, but anyone who has access to the spot market must be able to make delivery of gold on demand.

    The gold futures market is the market for gold at some date in the future. Gold futures trade on the COMEX (Commodities Exchange) in New York, now part of the CME Group (Chicago Mercantile Exchange). The gold futures contract is used by institutions as well as speculators. A futures contract is a standardized agreement to deliver or receive a specific amount of gold at some point in the future. The COMEX gold futures contract specifies delivery of 100 troy ounces of 995 pure gold. The notional value of the contract, based on a current gold price of $1390/Troy ounce is $139,000.00. (One Imperial, traditional, ounce = 28.35 grams; One Troy ounce = 31.10 grams)

    In early November, 2010 the CME launched a new gold futures contract, the e-micro. The e-micro is identical to the traditional gold futures contract except that it trades a notional 10 troy ounces of gold. If one makes or takes delivery of this contract, 10 ounces of gold changes hands. The e-micro can be thought of as a fractional traditional gold futures contract, so 10 e-micros equal one traditional contract.

    The contract allows a trader take a position that benefits from a rise in the price of gold or from a fall in price. Futures contract are designed to be uniform and can be long or short. If one is long, then they effectively buy gold, they own the commodity and benefit when the price rises. If one sells a gold contract and "gets short," then effectively, they sell gold. If the price drops, then they can buy their gold back for less than they paid. It is "buy-low, sell high," but in reverse.

    Futures markets are predictive. Participants seek to anticipate where the price of gold will be near the end of the contract and invest accordingly. The futures price of any commodity is based on price expectations and the interest rate. Interest rates matter because there is an opportunity cost to investing money in a futures contact. The money is not earning interest in a bank account, so that opportunity cost is factored into the futures price of gold by the market. Because interest rates are currently low, and a small part of the price factor, for our purposes we can ignore the interest rate impact.

    Despite the futures contract requiring physical delivery of 100 Troy ounce of gold, most contracts are closed before expiration requires delivery and it is not the norm that gold is physically exchanged. Even among large gold users, traders and investors, most gold is exchanged by electronic transfer while the physical good remains safely locked behind several layers of security at large, well protected banks and vault institutions. If one does take delivery of a gold contract, one actually receives a warrant for gold from a clearing depository.


    Article Source: http://EzineArticles.com/5340265
    Platinum Swing Trade Stock Alerts(FREE 14-Day Trial)

    The 10-Buck Broker (Long-Term Stock Picks)


    Best Stock Picking Services

    Sign up for the forum to reply to this post!!!


    Best FOREX Signals Software

    Stock Market Investing For Beginners


    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.


    Terms Of Service

    Disclaimer: This website provides information about the stock market and other investments. This website does not provide investment advice and should not be used as a replacement for investment advice from a qualified professional. This website is for informational purposes only. The Author of this website is not a registered investment advisor and does not offer investment advice. You, the reader, bear responsibility for your own investment decisions and should seek the advice of a qualified securities professional before making any investment.

    Promoted content: You should assume that this website has an affiliate relationship and/or another material connection to the persons or businesses mentioned in or linked to from this website and may receive commissions from purchases you make on subsequent websites. Always exercise due diligence before purchasing any product or service. This website contains advertisements.
    Best stocks to buy now Stock Market
    Best stocks to buy now
    Dow Jones TodayDJIA
Working...
X