Exploring Gold Futures and Silver Futures

Exploring Gold Futures and Silver Futures

Reading time: 8 minutes

Together with Palladium and Platinum, Gold and Silver are among the four most popular precious metals. Due to their rarity, high economic value and finite supply, they are often considered safe-haven assets in times of market uncertainty. For example, when stocks are heading south and the economy begins to show signs of contraction, both Gold and Silver tend to outperform. Both metals are also regularly employed to diversify a portfolio and provide a hedge during periods of elevated inflation. 

Precious metals have a wide array of uses. They are widely employed in the jewellery industry, enjoyed by millions for their unique colours and store of value, and are distinctive investment vehicles. They also possess a broad range of uses in the industrial sector, including in electrical and medical devices.

Several ways exist to trade and invest in the Gold and Silver markets, including Contracts for Differences (CFDs), Exchange-Traded Funds (ETFs), the options market, and the futures market, the latter of which is the focus of the following article.

The Futures Market Defined

The futures market falls under the umbrella of the derivatives market, which includes the forward market, the swaps market and the options market. Forwards, futures, and swaps obligate both parties (the long party [buyer] and the short party [seller]) to commit to a future transaction at a predetermined price, while options provide the holder of an options contract with the right but no obligation to commit. But, and this is key to understand, most derivatives contracts are just variations of a price guarantee. 

For the most part, futures trading involves two types of traders: hedgers and speculators. Derivatives were initially created to allow users to hedge (reduce) financial risk: the prospect that prices may move unfavourably. Speculators, on the other hand, assume risk, speculating in an attempt to profit from price movement through the buying and selling of futures contracts.

How Does a Futures contract work?

When a trader (speculator or hedger) enters a legally binding futures contract, this obligates a buyer (seller) to buy (to sell) the underlying asset at a specified price in the future. Of relevance, the counterparty to a futures trade will always be the futures exchange, made possible through the use of margin (more below). A futures exchange essentially provides a guarantee that a futures contract will be honoured by both parties (facilitated through the exchange’s clearing house).

Futures contracts are standardised to enable trading on a futures exchange. This means the contracts explain certain specifications, such as the type of underlying asset, minimum tick size, quality and quantity. You will also find that some futures contracts are cash-settled transactions while others have the option for physical delivery. 

One of the defining attributes of a futures contract is that users are not required to put up the full notional amount of the underlying asset’s value. This is called ‘buying on margin’, ‘margin trading’ or ‘trading on leverage’. So, if Gold futures are trading at $1,500 per troy ounce and you purchase 100 troy ounces, the total value equates to $150,000. But, given futures contracts are traded on margin, the futures trader must only put up a percentage of that value. Margin requirements are set by the futures exchange and the reason behind demanding this margin up front is to minimise credit risk: the risk that you will be unable to pay in full. Typical margin requirements can range between 5.0% and 15.0% of the notional value. 

Daily settlement is another noteworthy component of the futures market; active futures positions are marked to market daily. 

Traders are also encouraged to learn how to read a futures contract, understanding components like the contract month, root symbol and year. The FP Markets team posted an in-depth article here, which covers everything in detail. 

Discovering Gold and Silver Futures Contracts

• For Gold and Silver futures contracts, the contract’s specifications are laid out by the Commodity Exchange (or COMEX), which is the most recognised metal exchange and is now part of the CME Group.
• Futures traders can buy or sell 100 troy ounces of gold on COMEX per futures contract, which is referred to as the standard ‘contract size’. This means that each gold futures contract represents the obligation to buy or sell 100 troy ounces of gold at a predetermined price at a specific future date. An individual Silver futures contract on COMEX, on the other hand, stipulates that a futures trader can buy or sell 5000 troy ounces. Consequently, with the price of gold trading at $2,000, for example, this futures contract’s notional value would be worth $200,000. However, by trading on margin, the trader is not required to put up the full notional value to trade (it should be noted that the margin requirements will be higher for Gold futures, due to its higher price).
• Silver is clearly cheaper than gold. Current Silver front-month futures contracts (the contract with the nearest expiration date) are trading at $29.50, while Gold front-month futures contracts are trading at $2,391. This means that the silver market is a more accessible market for smaller investors, while in order to trade Gold futures, the investor would be required to have a larger trading account size to cover the margin requirements.  
• Both Gold and Silver futures contracts can be settled physically, though this is rarely done as most contracts are settled in cash before the contract’s expiration date. 
• Gold futures are generally considered to be less volatile than Silver futures. This means that the price of Gold futures tends to fluctuate less than that of Silver futures. There are several reasons for this, including the larger size of the gold market (increased liquidity) and the fact that gold is often seen as one of the major safe-haven assets.

FAQs:

1. What are Gold and Silver futures contracts?

A futures contract represents a standardised, legally binding agreement to buy or sell either Gold or Silver at a predetermined date and price in the future.

2. Where are futures contracts traded?

Futures contracts are traded on a regulated futures exchange. Popular futures exchanges are the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYMEX) and the Commodity Exchange (COMEX), where Gold and Silver are primarily traded.

3. Can I trade precious metals with FP Markets?

Yes. At FP Markets, we offer a wide selection of precious metals to trade via CFD pricing. Versus the US dollar (USD) you can trade Palladium and Platinum; you can also trade Gold and Silver prices versus the USD, the Australian dollar (AUD) and the euro (EUR). Find out more here.