Market Overview

Commodities 101: Gold Futures

Commodities 101: Gold Futures

Gold is one of the most important assets on Wall Street, and has been for hundreds of years. It’s by far the most popular of the precious metals—a family that includes copper and silver—and next to oil is the most actively traded commodity on the market.

Here’s a primer on how the gold market works.

How Gold Is Traded

Futures Contracts

Like all other commodities, the main way investors trade gold is via futures contracts. These contracts are standard, legally binding agreements that state a specific price and time in the future at which the physical gold can be bought or sold.

Gold futures are traded on the Chicago Mercantile Exchange and its subsidiary exchanges, which you can access through your broker. Each gold futures contract represents 100 troy ounces of gold, and they’re priced on a dollar-per-ounce basis.

In other words: 1 gold futures contract is worth $100.

These contracts can be traded in $0.10 increments, and expire at the end of every February, April, June, August, October and December.

Other Methods To Trade Gold

If you don’t want to trade futures, it’s possible to gain exposure to gold via equity instruments. Several mining companies are publicly traded—Newmont Mining Corp (NYSE: NEM) and Barrick Gold Corp (NYSE: ABX) are the two largest by market cap.

There are also ETFs and mutual funds, such as the SPDR Gold Trust (NYSE: GLD), that have a broader exposure to mining companies.

Some people like to even own physical gold, either in the form of coins or bullion (bars).

What Makes Gold Popular?

Gold is historically very popular among investors because of its use as a hedging and diversification tool. The yellow metal is seen as a “safe haven,” meaning people tend to buy gold during times of uncertainty in the stock market or economy and sell it during times of strength.

The relationship between gold and equities can vary. They can be inversely correlated at times, and directly correlated at others. This change in correlation is something market watchers pay close attention to, as gold can sometimes forecast the equities market, and vice versa.

The following charts from VantagePoint show this relationship in action. The first chart shows gold futures during the first half of 2018. The second shows the S&P 500 futures during that same time.

Gold futures in 2018

Chart courtesy of VantagePoint

S&P 500 futures in 2018

Chart courtesy of VantagePoint

Notice how the charts are inverses of each other at times, and move in lockstep at others.

You can see how gold withstands periods of weakness more than equities. For example the volatility in February led to a big drop in the S&P 500 futures, while gold held up a little more. The same can be said for late-March.

From April onward there’s a clear inverse correlation. Gold has repeatedly made lower lows, while the S&P 500 has made higher highs. This what’s known as a “risk on” environment, where investors are more willing to invest in “riskier” assets (relatively speaking). That’s why the S&P 500 future rose and gold futures fell during this time.

Gold has been in a clear downtrend since April 20, during which it’s dropped 8 percent. The S&P 500 futures on the other, despite a downtrend over the last two weeks, have been flat during that time.

The inverse correlation may be tough to spot when looking at a particular week or month, but by zooming out on a 6-month chart we can clearly see the relationship play out from late-April to late-June.

Related Markets

Gold’s unique position makes it one of the most influential markets in the world. How gold moves can influence the prices of the rest of the commodities market, the U.S. dollar, and the largest indices in the world like the Dow Jones and S&P 500.

These are the most correlated markets, according to VantagePoint.

Chart courtesy of VantagePoint

Gold’s versatility is what makes it one of the most widely followed markets in the world. But don’t underestimate the impact it can have on the rest of the global markets, and the impact the global markets can have on it. These relationships are at the core of trading gold.

VantagePoint Software is a content partner of Benzinga. For a free demo click here.


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