Gold Futures Explained

Lower levels of consumer confidence, a decline in the dollar, the risk of inflation and continued uncertainty about U.S. economic recovery lead investors into traditional safe-havens, such as gold. Weakness in the dollar tends to support commodities denominated in dollars — inflation decreases the dollar’s buying power.

Gold gives you a traditional hedge against inflation and a widely accepted store of wealth in an uncertain economic environment. You can either add gold to your portfolio of investments by buying gold futures or use gold futures to speculate on changes in the value of gold relative to fiat currencies like the U.S. dollar. Let’s go through the basics of gold futures and how to use them to your benefit.

What Are Gold Futures?

Understanding futures makes it easier to know how gold futures work. There are many types of futures — gold is just one type. Gold futures follow some of the same rules as many other futures contracts.

Futures are legally binding contracts between a buyer and seller to exchange some commodity or financial instrument at some point in the future. Although the last trading day of the contract is known as its expiration day, the exchange is actually made at a later date (the settlement day), but the buyer and seller of a contract agree on the price today.

You can generally recognize futures by their expiration month. For example, trading in the CME Group’s gold futures contracts expires and settlement occurs on the 3rd last business day of the contract month.

These contracts have a physical settlement type — available for delivery on any business day starting on the first business day of the delivery month until the last business day of the delivery month.

CME Group’s gold futures contracts are generally available for three consecutive months and then on a quarterly schedule expiring in March, June, September and December. For example, a September contract on gold expires in September, and a December contract expires in December. Do not confuse futures with options — futures are an obligation to buy or sell. With options, you have a choice of whether to execute the contract or not on its expiration day.

Gold futures are specifically made for speculators and hedgers to buy and sell gold. If you buy a December futures contract on gold, you are obligating yourself to take possession of 100 troy ounces of gold at the per ounce price of the contract on the contract’s expiration date in late December. The seller can either deliver the contracted 100 ounces of physical gold or offset his position by buying back the futures contract.

A Few More Notes on Gold Futures

Very few gold futures contracts ever end in settlement by delivery. The futures contract seller typically covers a short futures position at a profit if the price of gold has declined — and takes a cash loss if the price has risen.

If you buy a gold futures contract, you will most likely have to either roll your position into the next month or sell your long futures contract since delivery of gold is at the future sellers’ discretion, not the buyer’s. You’ll probably never be able to take delivery of the physical commodity by using a gold futures contract. If you expect to buy a contract and take delivery of the physical gold, you must have all of the funds available for the 100 ounces per contract, apply with the exchange and follow a certain procedure to be able to take delivery.

The value of the gold futures contract will rise and fall with gold price fluctuations. You can take your profit or loss, depending on the price of gold when you decide to close the contract out on or before the future’s expiration date.

Most futures brokers will not even allow you to take physical delivery because they do not have the appropriate infrastructure to store and deliver it to you securely. Brokers will state that they do not assign and will close out your position for you just before expiration for a fee.

Best Brokers for Futures

If you want to purchase a futures contract, the easiest and safest way to do so is through a regulated futures broker. Take a look at the choices below. Some brokers have their own trading software, while some still allow trading over the phone. 

How Much is a Gold Futures Contract?

Gold futures control 100 troy ounces of gold. The market value of the contract is 100 times the current market price for 1 ounce of gold. For instance, if the market price of gold is $1,950, the value of 1 gold futures contract is $195,000 ($1,950 x 100 troy ounces). Keep in mind that troy gold ounces are not the same as regular ounces and are 31.1 grams in weight versus 28.3 grams for regular ounces, which is almost a 10% difference.

However, GME Group’s gold futures (and most listed futures) trade on margin. If you have a margin account with your broker, you do not have to pay for the full contract in cash. You instead pay only the amount that your broker requires based on that broker’s margin requirements. That margin requirement will never be lower than the industry standard on margin requirements, which is set by the CME Group’s COMEX 100 Gold Futures benchmark. Depending on your broker, you may have to pay more than this benchmark margin amount to open a gold futures trade.

You must also maintain a certain amount of cash, known as the maintenance margin, to continue holding a futures contract. If you’re holding a contract when the price of gold falls substantially, your broker may ask you to deposit more funds as a margin to stay in or maintain the trade. This is known as a margin call. If you refuse to comply or cannot transfer money into your margin account within a certain time frame, your broker will close out your open positions.

Outlook on Gold Futures

The major factors that will keep gold surging include the following:

Inflation Concerns

When inflation goes up, currency loses its purchasing power, prompting investors to look for safer assets such as gold. This increased demand often raises gold prices, as both individuals and institutions use it as protection against inflation.

Global Economic Uncertainty

Economic instability, such as geopolitical tensions, trade wars, and crises, may result in higher demand for gold. Investors tend to turn to gold in uncertain times, seeing it as a stable asset that can maintain its value during market fluctuations.

Central Bank Policies

Central banks frequently purchase gold to diversify their reserves and lessen dependence on fiat currencies. When several central banks buy gold, it can lead to higher gold prices due to increased demand and diminished supply in the market.

Weakening Currency

When the U.S. dollar or other major currencies decrease in value, gold can become more attractive to investors because it usually moves in the opposite direction of the dollar's strength. As the dollar weakens, gold costs less for those holding other currencies, which may lead to an increase in demand and prices.

Low Interest Rates

When interest rates are low or negative, the cost of holding non-yielding assets such as gold becomes lower. As a result, investors are more likely to choose gold when they aren’t getting much return from traditional interest-bearing investments, which can lead to rising gold prices.

What Time do Gold Futures Open?

The CME Group’s gold futures pre-market opens at 5 p.m. Eastern Standard Time (EST) on Sunday, while the formal market opens an hour later at 6 p.m. EST. The market then trades continuously throughout the week, except for a brief 15-minute break on Monday through Thursday, from 6:45 p.m. to 7 p.m. EST.

Other gold futures markets have different opening hours. Note that if you open a contract in 1 futures market, you cannot close it out in another, although you can have two outstanding opposing futures contracts open in different markets your broker provides access to if you have the required margin available.

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Long-Term Hold or Quick Profit?

The leverage that a futures contract gives you has an upside and a downside. You can control a large amount of the commodity without spending much, but your losses multiply if a trade moves against you. For this reason, it’s very important to have a plan when you invest in or trade gold futures. You should know why you’re getting into the market and detail your exit strategy before you enter a trade.
If you are looking at gold as an inflation hedge or a long-term investment, any pullback may be an opportunity to buy in. If you want to trade gold more actively, you might want to carefully consider news of the dollar’s value fluctuations and high-level commentary on the state of the global economy.

Frequently Asked Questions