5 Differences Between Trading the S&P 500 E-Mini & the Micro E-Mini Futures
Trading guides, webinars and stories
Trading guides, webinars and stories
Gold remains one of the best places to start for investors looking to step into the precious metals space; and with good reason. For one, it is known and respected all over the world for its value and rich history. It has also been clearly interwoven into diverse cultures for thousands of years. Across the centuries, people have continued to hold gold for various reasons, but what is perhaps the most fundamental reason to invest in this precious metal is that it is an ideal store of value asset. Gold is the number one metal we fall back to when other forms of currency fail. In fact, up until the 1900’s, it was the standard on which many countries based their monetary systems.
Before we get into the nitty-gritty of trading gold, it is important to have at least a general idea of why it is so appealing as an investment vehicle:
If you’re looking to hold an investment position in gold, there are a number of ways to enter the market. One way is through gold futures. What does this strategy entail? How does it fit into your investment portfolio? What are some proven tips to trade gold futures successfully? Below, we provide the answers by outlining the top eight things you should know about trading gold futures:
In simplest terms, a gold futures contract is a legally binding agreement between an investor and a seller, stipulating the sale and delivery of the gold at an agreed-upon price in the future. In other words, you reach an agreement with someone that you will purchase or sell gold in the future for a price you both agreed on today.
Whether you buy or sell the gold depends on the kind of position you choose to take: long (buy) or short (sell). While there’s a lot of fancy financial jargon used to describe these positions, the important thing to understand is that you are taking a good look at the gold market and making a decision based on expected price movements. You take a long position if you expect the price of gold to go up and take a short position if you expect the price to fall.
Central Banks are the biggest buyers of gold in the last 7 years | Data Source: Bloomberg
Like other investment strategies, the futures market is concerned with turning in a profit or at the very least, minimizing the risk exposure to price volatility by agreeing to a gold price in advance. For example, let’s say you’re keenly interested in owning gold and decide to buy 100 grams of gold from the futures market at an agreed price of $ 5,000, with the delivery scheduled for five months from now. The current price of one gram of gold is approximately $50. Let’s say in five months when you take delivery of the gold, the price has risen to $55 per gram. That means you made a profit of $500 from your long position at current rates, which is a 10% 5-month return on your initial $5,000.
What about if you choose to take a short position? Same scenario, but this time you’re the one selling. An investor approaches you and wants to buy 100 grams of gold at $5,000 for delivery in five months’ time. Let’s say when the time comes to deliver, the price per gram has fallen to $45. That means you made a profit of $500 by locking in the price at $50 per gram five months ago. There’s a lot of other scenarios on how a futures contract will play out, but you get the general idea.
Since price plays such a huge role in determining what position you take in a gold futures market, it only makes sense to understand what factors influence its movement. The price of gold fluctuates every day, but the starting point is typically coordinated through the London Bullion Market Association (LBMA) and usually referred to as the London Fix. At 10:30 AM and 3:00 PM London time every business day, a consortium of large financial organizations that deal in major bullion purchases and sales set the starting trading price for the day. This is then used as a benchmark for the initial pricing of gold products and derivatives across the world’s markets.
Historic and forecasted global demand and supply for gold | Data Source: Global X
Since there are several exchanges that trade in gold futures across different time zones around the world, it is important to have a “spot price” of an ounce, gram, or kilo of physical gold. This way it is easier to track daily gains or losses based on this starting point. After that, it’s a matter of market forces coming into play and causing the price of gold to go up or down throughout the day. In this regard, the gold futures market is pretty much similar to how the stock exchange works; investor sentiment brings about a continual process of price discovery. Except with gold futures, trading is done through standardized contracts instead of shares.
If you’re looking to invest in gold futures, then you’ll need to decide which exchanges you would like to utilize. A futures exchange standardizes the terms of the contracts, clearly stipulating the quantity, quality, settlement time, and place of delivery, but the price remains variable. It also matches bid prices from buyers with ask prices from sellers and then oversees the creation of the futures contract when both parties reach an agreement.
The COMEX officially began trading gold futures contracts in 1974, making it one of the oldest exchanges for this particular asset, as well as the largest. Let’s take a look at their contract specifications for gold futures:
Specs for Standard Gold Contracts
|Contract Size||100 troy ounces|
|Price Movement||Minimum of $0.10 per troy ounce|
|Price Quotation||USD dollars and cents per troy ounce|
|Settlement Method||Physical delivery|
|Trading Hours||CME Globex: Sunday – Friday 6:00 PM. – 5:00 PM (5:00 PM. – 4:00 PM /Chicago Time) with a 60-minute break each day beginning at 5:00 PM. (4:00 PM Chicago Time)
CME ClearPort: Sunday – Friday 6:00 PM – 5:00 PM (5:00 PM – 4:00 PM. /Chicago Time) with a 60-minute break each day beginning at 5:00 PM (4:00 PM Chicago Time)
|Trading Months||Monthly contracts listed for three consecutive months and any February, April, August, and October in the nearest 23 months and any June and December in the nearest 72 months.|
|Delivery Period||Delivery may take place on any business day beginning on the first business day of the delivery month or any subsequent business day of the delivery month, but not later than the last business day of the current delivery month.|
|Termination of Trading||12:30 PM Chicago Time on the third last business day of the delivery month.|
Data Source: CME Group
The contract specifications for the micro and E-mini contracts are quite similar except that the contract sizes are 10 ounces and 50 ounces respectively. The minimum price fluctuation for the E-mini gold futures contract is also different with a value of $0.25 per troy ounce.
From the above data, we can begin to understand how gold futures are actually traded. For example, since gold is traded in dollars and cents per ounce, then an investor taking a long position at a price of $1,500 per ounce has a futures contract worth $150,000 ($1,500 x 100 ounces). If he then decides to sell at an ask price of $1,510, then he makes a profit of $1,000 ($1,510 – $1,500 = $10; $10 x 100 ounces = $1,000). On the other hand, if he sells at $1,490, then he loses $1,000.
Consider the minimum price movements of gold futures. For the standard gold futures contract, the minimum price movement is pegged at $0.10 x 100 ounces = $10. This movement is called a “tick”. It typically determines how much profit or loss is made depending on how many ticks the price moves away from the original price when you entered the market. That means if you entered the market and the price moves 12 ticks above or below your entry price, your profit or loss amounts to $120 ($10 x 12 ticks = $120).
The same principle applies whether you’re trading an E-mini or micro gold futures contract. For the former, the tick movement is pegged at $12.5 ($0.25 x 50 ounces), meaning any movements in price is measured at $12.5 per tick. For the micro gold futures contract, the tick size amounts to $1 ($0.10 x 10 ounces).
Dealing gold futures means finding a good futures broker. This organization is usually a member of the futures exchange you’ve chosen to trade on and will essentially manage your relationship with the futures market.
You’ll need a minimum amount in your trading account before entering the market. This amount varies depending on the policies of the broker, but you can expect it to cover not just the cost of the futures contract but also enough to accommodate for potential losses. This amount is known as the intra-day margin. The type of contract you’re buying also dictates your intra-day margin. If you’re trading a standard gold futures contract, the amount required is usually different from what is expected to open a position for an E-mini gold futures contract.
Obviously there are other ways to dabble in the gold market, like gold options, gold ETFs and even just buying gold bullion and storing it safely in your vault. So what’s the big deal with gold futures anyway?
Obviously you shouldn’t take this as explicit trading advice, but rather a selection of handy tips that successful traders have used to profit from the futures market. As a beginner, you’ll want to start your journey into gold futures trading with a detailed fundamental analysis of the market. Pay attention to which way the market sentiment swings, whether positive or negative. If the former, then gold is deemed undervalued and will likely adjust to its expected higher price; and if the latter, then gold is deemed overvalued and will likely go down to its expected lower price.
Consider all the factors that can influence the price of gold, especially if there is a sudden shift in other financial markets and the Central Bank’s rate of buying and selling gold. You’ll also want to look at the current industrial demand for gold to have an informed idea of which way the market will likely swing in the near future.
Lastly, keep an eye on the market movements of bitcoin. Given the number one cryptocurrency’s strengthening fundamentals and the fact that it has been referred to as “digital gold,” a continuing rise in bitcoin’s market share may someday be large enough to pose a serious threat to the gold market.
No doubt about it; the futures market is complicated, risky, and can be quite expensive. But if you know what you’re doing, your journey to becoming a bonafide gold bug through the gold futures market may be a profitable venture, as well as a solid addition to your portfolio. Of course, the key here is to arm yourself with as much knowledge about the ins and outs of the gold futures market and a viable strategy for navigating its volatility. And if you feel like this investment strategy is not for you, there are several other options for trading gold. What’s important is that you are adequately prepared.