"Gold futures" is another financial instrument used for buying or selling gold. Futures are financial contracts where the buyer or seller has the obligation to purchase (or sell, if you’re the seller) an underlying physical commodity or financial product. Although the underlying commodity (gold) is the same, spot gold and gold futures are traded very differently. The governing rules, trading hours, trading symbols, types of contracts, and contract sizes for gold futures are different from spot gold. Spot gold is bought and sold at over-the-counter (OTC) dealers such as found in the FOREX market. On the contrary, gold futures are traded in commodity exchanges around the world where gold, silver, and other precious metals are traded. In any futures market the buyer or seller has the right to buy or sell a commodity, or financial instrument at a determined price and quantity in the future. Unlike spot gold, where the settlement date is set based on the date of the transaction, gold futures contracts use a pre-defined, future calendar month expiration date. When a contract expires in the gold futures market, the buyer is expected to take delivery of the commodity. However, today most investors do not take delivery of the physical gold asset, but pay a fee to have it securely stored or they try to buy or sell the gold at a profit before the contract expiration date. The investor's bank account is electronically debited or credited to reflect any financial transactions. Gold futures are often used as a hedging tool for commercial producers and large consumers or users of gold. Hedging is a trading strategy where a financial position is taken to protect or reduce losses in a companion asset due to fluctuations in price. Hedgers try to minimize the risk of a price change that would negatively impact them. Usually the hedge position is closed by offsetting the hedge amount. A loss in one investment is offset by a gain in a derivative asset.
How is gold measured?
What are the gold rates? Global price discovery for gold is done in the gold futures market. However, the largest gold market is in London and is called the "The London Fix", "London fixing", or "gold fixing". The London Fix is a meeting that occurs via conference call twice a day by members of London's five largest bullion banks. The current members of the London fix are: Barclays Bank, Deutsche Bank, HSBC Bank USA, ScotiaBank, and Société Générale. In 1987, London Bullion Market Association (LBMA) was incorporated. Members participating in the London Fix must also be a member of the LBMA. The London fix occurs daily in the morning at 10:30 am (the morning Fix), and again at 3:00 pm (the afternoon fix). The banks set the price of gold based on an aggregation of the buy or sell orders that the banks collectively have for gold. If it is out of balance, the Chairman will adjust the proposed price of gold, upwards if there are too many buyers, and downwards if there are too many sellers. The five largest bullion banks have incentive to keep the price of gold low because they are not the only dealers of gold, and investors can go elsewhere in the world to purchase gold. Prior to World War I the world reserve currency was the British pound, and the price of gold was set in pounds sterling. Today, the US dollar is the reserve currency of the world, and the price of gold is set in US dollars.
Gold is measured and sold by troy ounce. A troy ounce is based on the British imperial system of weights and measurement, and weighs slightly more than a US ounce (avoirdupois). A troy ounce is equivalent to 31.1034768 grams or 1.0971428 ounce. The London Fix deals in 400 troy ounce bars of gold. Gold is also traded around the world in smaller quantities, grams. Futures, on the other hand, are sold by different sized lots, each having their own trading symbol to differentiate the lot sizes. For example, for trading on the COMEX exchange in NY, there are lot sizes of 100 troy ounces (symbol GC) for a standard lot, 50 troy ounces for a mini lot (symbol GO), and 10 troy ounces (symbol MGC) for a micro lot. There are three basic forms of physical gold that are traded: bullion, bars and coins. Bullion is almost 100% pure gold, and represents the large quantities of gold that are traded on the financial markets. Bars are smaller than bullion and are individually cast or minted in specific weights with varying numismatic values. Minted bars are made by cutting gold into specific dimensions from flat pieces of gold. The minted bars are then stamped (pressed) with desired markings. On the contrary, ingots are cast from molten gold poured into a mold with the desired markings already inside the mold. Ingots are sometimes called "biscuits", and they tend to be thicker and are not as smooth as minted bars. Gold coinsare minted of pure, and nearly pure gold by different countries. Coins are round in shape and come in a variety of sizes, styles and purity. They are produced as per detailed specifications as given by many governments throughout the world. Companies regularly produce special editions of coins for investment purposes or as collector items. Examples of these are the American Eagle, the Royal Canadian or Maple leaf, and the Chinese Panda coins. The quality of gold is determined by how pure it is. There is a minimum standard of purity set by the market for every precious metal that is bought or sold. It can be described using karat (parts of gold per 24), percent (parts per 100), or fineness (parts per 1000, used in Europe). For example, 24K = 100% = 1000 fine. However, it is likely that no metal is 100% pure, so it is more accurate to say 24K = 99.9% = 999 fine..
Buying and storing spot gold
You can buy spot gold on the London or NY markets, online, and at auctions. You must decide how you would like to invest in gold. You may buy and take delivery of the physical gold, specify delivery to a vault where the gold is to be stored on your behalf, or buy shares of a gold stock or an exchange traded product for gold. The main factors to consider when buying gold are security and fees. It is best not to store gold in your own safe. Also note that gold de-values if you remove it from a permanent storage facility, because the gold will need to be re-evaluated by a gold specialist, which is an expensive procedure. If your gold never leaves the storage facilities, it doesn't have to be re-evaluated. It is wise to not store all of your gold in one location. Your gold storage plan should include domestic as well as an off-shore component. To avoid the costly and risky transfer of the physical gold every day, the London Bullion Market Association (LBMA) has a clearing system where it records book entries for ownership. Their system is split into allocated and unallocated gold accounts. The allocated gold accounts are opened when a customer requires metal to be physically segregated and needs a detailed list of everything about the gold such as the unique bar numbers, weights and assays. The client has full title to the metal in the account, with the dealer holding it on the client's behalf as a custodian. With an allocated gold account credits or debits to the holding will be affected by physical movements of gold bars to or from the client's physical holding. Unallocated gold accounts are simpler, cheaper to manage, and the most commonly used method to hold gold. With unallocated gold accounts, specific gold is not set aside or detailed, but the client is entitled to the metal. If the client of an unallocated account requests physical metal, only then is it allocated to the client with a specific bar or equivalent bullion product. Unallocated gold does not need to exist physically at the clearer, but it exists as a liability on the clearer's balance sheet. Transactions are settled with debits and credits to the client's account, but there is no physical movement of the actual metal. Similarly, transactions for exchange traded products like ETF (exchange traded fund), ETN (Exchange traded note), or CEF (closed-ended fund) go through a clearing firm who debits or credits the clients account accordingly. Exchange traded products for gold are traded on the major stock exchanges around the world (Zurich, Mumbai, London, Paris, and New York).