February 4, 2014

You Have Heard of the Futures Market – But What Is It?

There’s more than one way to invest in gold and silver. One of those is through the futures market. This is actually becoming a very fluid and attractive market for speculators all over the world. Most investors do want the opportunity to trade gold and silver, but they may not want to carry them first hand. Gold and silver futures give them the ability to trade the assets without actually buying them outright.

What is the futures market?

The term sounds scary and complicated but it’s really not that difficult to get the hang of it. Futures are in essence just what they sound like, a prediction on future movement. An investor speculates on which direction the gold or silver is going to run in by the expiration, or delivery date, of the contract, and then moves into a position. While they use the term delivery date, investors hardly ever transfer the real goods. Instead, they are more likely to return it to the market for cash if they win or take their loss.

Futures contracts can be on anything, but were initially created from the commodities market. Many years ago farmers would come to the market to sell their produce at cash price, but they would often be left holding a surplus by the end of it. That’s risky business on any asset as the supply becomes heavy like that. This is why they created futures contracts that would give the farmers more foresight on the future supply demands. This saved them from enormous losses, and also created a vibrant derivatives market in the process. In fact, this same method now extends to virtually all assets including gold and silver.

How to trade gold and silver futures

Getting started in this market isn’t all that difficult either. Currently there are two very popular exchanges where speculators can buy futures contracts of these precious metals. They are the COMEX and eCBOT. They act as the go-between for buyers and sellers which in turn help to ensure the agreement is upheld by both parties.

futures market

It’s a REAL Market!

Again, the speculator begins by predicting which way the metal will go by the end of the delivery date. Just like other assets, futures traders can make money on both the buy and sell depending on which direction they believe it will go. If they think the value will rise in the pre-determined amount of time then they would go long on a contract. This means they are entering an agreement to purchase the metal at a future date but at the current price. If they believe it will lose value then they will short a contract. This means they will be the one delivering the asset to the buyer at a premium if their assumptions are correct. All of the details will be spelled out completely for the investor before they ever enter into the agreement.
The tick movement for gold and silver is different. Gold moves in 10 cent increments, while silver has a few price movements starting as low as .001 per ounce. Both have the use of leverage as well. With gold, each futures contract is worth 100 troy ounces. Silver contracts are bought in either 5,000 ounces or 1,000 ounces depending on how much capital the trader has to work with.

Like any other assets, there are different strategies that investors can take to maximize their profits. Hedging is very popular in these gold and silver futures. In the end, futures are a great way to get into the precious metals without actually doing any of the heavy lifting. This is making it very popular with those who wanted a more hands off approach, and continues to be a good avenue for new fortunes as well.

Carl Croft

Carl is an active trader of forex, stocks and commodities who mainly uses charting and candlestick strategies. An author on various trading websites and is admin here!.