Gold Futures


Gold futures are a standardized agreement to exchange a fixed amount of gold at a set price on a certain date in the future. Gold futures also allow you to manage risk by allowing you to hedge (reduce risk), or speculate (increases risk) against price changes of gold.

More About Gold Futures

Continue reading to learn more about:

How do gold futures contracts work?
How are gold futures settled?
What happens when gold futures expire?
How long can you hold a futures contract?
What happens if you don't sell futures contracts?
Other information about gold futures


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How do gold futures contracts work?


A gold futures contract is a financial agreement to buy or sell a set amount of gold at an agreed-upon price. Like any futures contract, it allows you to lock in the price of gold to reduce your exposure to fluctuations in the price of gold. The contract is traded and settled like a stock, so you don't have to take physical delivery of the gold. Gold futures contracts can be used to hedge existing holdings of bullion or to speculate on future prices.

 
 

How are gold futures settled?


Gold futures are settled differently than silver futures. Gold futures are marked-to-market at the price of the London PM Fix on the 2nd business day preceding the delivery date. Gold contracts are usually settled in cash—in a quantity of one troy ounce of gold bullion. The price is determined by spot market prices during a normal trading day when gold is traded as part of the global interbank forex currency market.

When the delivery month arrives and if the seller does not make or take delivery, he/she must deliver or buy back (at current prices) an amount of gold futures contracts equal to the number he/she sold short plus any interest that was due as a result of your short position closing out that long position. The long you have sold can be repurchased now at settlement at today's settlement price minus any premiums or fees associated with closing out your position.

 

What happens when gold futures expire?

When gold futures expire, they expire at the last trading price. You have a choice to either trade out of your position or trade into a new position. When you trade out, you essentially close your position and walk away from the trade. When you trade into a new position, you enter an entirely new futures market essentially starting from scratch with a different contract month and strike price.

How long can you hold a futures contract?

It's true, the longer you hold a futures contract open, the more you will potentially could make or lose. Why? Futures contracts have time limits on them! But don't worry; there's something called rolling over. Rolling over means that you extend your position and hold a contract open for another period of time. Each futures contract has its own month, and each month has a different expiration date. But how do you know when to rollover? It depends on how long you plan to hold your position.
 
  • What happens if you don't sell futures contracts?

    After the futures contract expires at its final settlement price, you will have a futures position in gold worth the difference between the price set by the final settlement price and your short position. You can hold this futures position over time to gain additional exposure to gold prices or close your short position with a buy-to-close order.
  • Other information about gold futures

    As the term suggests, Gold Futures are a legally binding agreement in which a trader buys or sells gold for delivery on a future date at a predetermined price. The important thing to know about futures is that they do not represent a short-term investment: they are used by investors who want to own and profit from gold, but don't want the inconvenience of storing the precious metal or worrying about fluctuations in value.