Gold Futures

Gold futures are a form of derivatives futures trading with gold as its underlying asset. Futures trading on gold involve an agreement between a buyer and seller to trade a fixed amount of gold, with the help of a dealer who is accredited to a futures exchange. This trade is contracted to take place on a specified date in the future for a specified price.

Trade in Gold futures has continued during the past two decades on most of the futures exchanges around the world. The contractual requirements of these respective exchanges may vary in details but the broad outlines remain the same.

Though gold futures are traded on various exchanges around the world, it has been traditionally considered as a North American activity. Gold futures are traded on the New York Commodities Exchange (COMEX) which is a division of the New York Mercantile Exchange (NYMEX). In India, gold futures are traded in the National Commodity and Derivatives Exchange (NCDEX).

How are Gold Futures Traded?

The futures exchange treats the gold futures trade as a highly standardized contract. It provides a framework through which a high degree of security, transparency and probity is ensured to the investors of gold futures.

Only those who are listed members of a futures exchange have access to the trading floor. This membership can be purchased by a financial firm as well as an individual who is able to satisfy certain criteria fixed by the exchange. The criteria include sound financial standing and other facets in the investing business. Like trading in other commodities, there is ‘pits’trading in gold futures, which involves open outcry by licensed brokers. The clients are expected to put up just a small proportion of the potential value of the entire contract. This margin is fixed by a division of the futures exchange.

Benefits of Gold Futures Trading

Futures trading enables the speculators and other participants an opportunity to participate in the market on a highly leveraged basis. The process also adds liquidity into the market.

Risks of Gold Futures Trading

Since the outlay posted for each futures contract is relatively modest, a small adverse effect in the movement of gold prices can result in the loss of entire initial margin deposit.