Futures Contract Information
A Futures Contract is a commodity that trades on a futures exchange in a standard contract size for delivery at a future date.
The concept of “future” is what throws most people off. It really means that some entity wants to buy or sell the commodity at some time in the future at a price agreed upon today. Remember, futures contracts were created for those with a commercial interest.
Gold Fundamentals:
Gold is a superior industrial commodity, which is an excellent conductor of electricity and very resistant to corrosion. Gold is mostly used in the production of jewellery and minting coins.
The world's 4 largest producers of gold currently are South Africa (16%), U.S. (12%), Australia (11%) and China (7.5%)
In the USA, Nevada is the largest gold producing state by far, then Alaska and California.
Investment vehicles for gold are: gold futures, gold bullion and coins, gold ETFs and gold mining stocks.
How Does a Futures Contract Work?
A buyer and seller create a futures contract. It will consist of a standardized contract of a commodity established by a futures exchange.
It will consist of:
· The commodity
· Date to deliver the commodity
· Amount of commodity
· Price of the commodity
For example; Acca Gold Mining, Inc. wants to sell 100 ounces of gold they will have mined by August.
XYZ Jewelry Makers wants to buy 100 ounces of gold to make gold rings that they will start manufacturing in September. Since it is currently just March, there is plenty of time where the price of gold could move much higher or lower.
If Acca Gold Mining waits until August to sell their 100 ounces of gold, they run the risk of the price dropping – thus hurt their profits. Oppositely, if XYZ Jewelry Makers waits to buy their needed gold, they run the risk of paying a higher price-thus hurting their profit margins.
This is why both parties create a futures contract – to hedge their risk on the price of gold and to ensure a sale or delivery of gold. One of the most attractive features is that they can close a contract anytime they want during market hours. In fact, less than 5% of futures contracts are held until delivery.
Here is how a futures contract would work in this situation;
Acca Gold Mining sells a 1st August Gold futures contract at $625 per ounce. XYZ Jewelry Makers buys 1 August Gold futures contract at $625 per ounce.
The futures contracts are traded on the New York Mercantile Exchange (NYMEX) and consist of 100 ounces of gold. Delivery of the 100 ounces is to be made in August. These two parties are not necessarily making a futures contract with each other. Some other entity could be on the other side of the trade.
If either party decides they no longer need the futures contract for their business needs, they will buy or sell in the open market to close their position and either a speculator or a commercial will take the other side of the trade.
If XYZ bought their contract at $625 and sold at $640 two month later, they would make $15 per ounce or $1,500 on their futures contract.
If they both hold until the contract expires in August, XYZ will take delivery of 100 ounces of gold and pay $625 per ounce, while Acca Gold Mining delivers 100 ounces of gold and gets paid $625 per ounce.
So, in this example, gold is the commodity and the futures contract is the means by which gold is traded.
Futures Contract Size:
Futures do not trade in shares like stocks. They trade in contracts. Each futures contract has a standard size that has been set by the futures exchange it trades on. For example, the contract size for gold futures is 100 ounces. That means when you are buying 1 contract of gold, you are really controlling 100 ounces of gold. If the price of gold moves $1 higher, that will affect the position by $100($1 x 100 ounces). You need to check each commodity or futures contract since most of them are different.
Delivery Months:
Delivery months are also commonly called contract months. If you are familiar with stock options, you know that option contracts expire in designated months. The same applies for futures. The reason has to do with delivering the actual commodity.
For example, a November soybean futures contract means that someone will be delivering 5,000 bushels of soybeans in November and someone will be taking delivery of the soybeans. Some futures only have a few delivery months and others have all 12 months. The contract will expire after the designated date in the delivery month.
Ticker Symbols for Futures Contract:
Futures tickers are a little different from stocks. Each futures market has a ticker symbol that is followed by symbols for the contract month and the year. For example, crude oil futures have a ticker symbol - CL. The complete ticker symbol for December 2007 Crude Oil Futures would be - CLZ7.
The “CL” stands for the underlying futures contract.
The “Z” stands for a December delivery month. (F=Jan, G=Feb, H=Mar, J=Apr, K=May, M=June, N=July, Q=Aug, U=Sep, V=Oct, X=Nov, Z=Dec)
The “7” stands for the year – 2007.
This is the standard formula for futures ticker symbols. Some quote services are a little different.
Minimum Fluctuations or Tick Size:
This describes the smallest increment a given futures market can move – also called a tick.
For example, a tick in say crude oil would be .01 or 1 cent. The contract size of Crude Oil is 1,000 barrels. To calculate the value of a tick, you would multiply 1,000 x .01 = $10. So, every time you see the price of Crude Oil move up or down .01, you know that means it’s a $10 move. A 5-cent move in the price of Crude Oil would mean it is worth $50 if you are trading one contract.
Contract Specifications are something you should have memorized before you begin trading commodities and futures. Significant errors can be made by not knowing these numbers. I have seen rookie traders take positions by mistake on contracts that were far too large and volatile for their accounts. Better to prepare beforehand or you will learn the hard way.
Gold Futures Contract Specs:
· Ticker Symbol: GC
· Exchange: NYMEX
· Trading Hours: 8:20 AM until 1:30 PM EST.
· Contract Size: 100 troy ounces
· Contract Months: Feb, Apr, Jun, Aug, Oct, Dec
· Price Quote: price ounce. Ex $655.50 per ounce
· Tick Size: $0.10 (10¢) per troy ounce ($10.00 per contract).
· Last Trading Day: Close of business on the third to last business day of the maturing delivery month.
Tips on Trading Gold Futures:
- Gold typically moves higher in times of crisis and panic. A stock market crash, an unexpected war and terror attacks can lead to a buying frenzy in gold to use as a safe haven.
- Gold has historically moved higher during periods of high inflation.
- Supply and demand always play a part in commodities. An increase in speculation in gold from investors can lead to higher demand and cause gold futures prices to move higher.
- Gold futures prices have an inverse relationship with the price of the U.S. dollar, since gold is priced in dollars. If the value of the dollar declines over time, the price of gold should rise.
For additional information or to request a Futures Contract, please forward your inquiry here.