Greetings traders and welcome back.
Thank you for joining me for another Survival Guide episode.
Today, we are going to be covering gold futures. We'll talk a little
bit about the history of gold, and then we will dive into
the futures aspect. So let's get going.
Gold: It's something that everyone wants, and no one is unhappy
to receive it.
Unless of course, you have some strange allergy.
But before we go further, let's talk about some of the science behind gold.
So gold is a chemical element with this symbol, Au. In
its purest form, gold is dense, soft, malleable, and ductile.
This makes it good for use in technology because of its ability
to be turned into wires and used in circuit boards, et cetera, et cetera.
It is solid under standard conditions, which is a good thing
considering liquid gold at room temperature would be quite
a problem. Gold is resistant to most acids, making it a very
durable substance. Gold is a relatively rare element, adding
to its value. Gold is a good conductor of heat and electricity as well,
which once again, adds to the value of gold. If we understand
the value that gold holds, we'll better understand why people want it.
In order to understand gold in its entirety,
we must first go back to the beginning.
Gold is something that's always been highly valued, whether
it be for coinage, or jewelry, or arts.
It is always been considered a unique store of value as well
as a symbol of power, strength, and wealth. Since the 2000's,
we've seen gold at times more than quintuple in value. Approximately,
65% of all the gold in the world has been mined since 1950,
and the finite supply of gold adds to its rarity and attraction.
But how did it all begin?
Well, various forms of livestock, in particular cattle, and
grains were some of the earliest forms used to settle trades
for payments of goods and services. The problem with this,
cattle are hard to carry in your pocket. The world
needed an alternative currency. In 560 BC, the Greek state
of Lydia and Asia Minor introduced the first gold coins.
So we've seen gold coins since 560 BC. The use of gold coins
as currency spread quickly throughout the Mediterranean and
the Middle East regions. The Romans mined gold extensively,
and Venice introduced the gold ducat, which became the most
popular coin in the world
for the next 500 years. In 19th century America, a movement
to use silver coins and adopt a bimetallic monetary system
finally emerged. The U.S. Congress did not authorize the printing
of paper money until somewhere around 1861. For most of the
early 20th century, Americans were forbidden to buy or trade
gold. In 1946, the Bretton Woods Agreement fixed the price of
gold at $35 an ounce, creating a gold standard, and the U.S.
dollar became backed by gold. A gold standard is defined as
a monetary system in which the standard economic unit of
account is a fixed mass of gold.
The Bretton Woods Agreement of fixed exchange rates was implemented
to combat deflationary pressures, economic dislocations, and
currency instability, which emerged after World War I and
World War II. Soon after the agreement was signed, the U.S.
dollar became the world's reserve currency. In the following
years, there were significant strains on the system of fixed
exchange rates as the U.S.
balance of payments with the rest of the world grew dramatically.
Foreign exchange banks exercise their gold convertibility
rights, causing a sharp decline in U.S. gold reserves.
In 1971, the Bretton Woods system was abandoned
when there was no longer enough gold to cover all the paper
money in circulation. The U.S.
dollar became a fiat currency backed by nothing more than
the health of the U.S. economy, and the promise of the U.S. government.
A fiat currency's value is based on the issuing authorities'
promise to pay, not an intrinsic value or extrinsic backing.
In 1974, the ban on U.S. ownership of gold bars was lifted, and U.S. citizens
were allowed to trade gold yet again. The end of the gold standard
ushered in the current system of floating exchange rates.
In 1972, the Chicago Mercantile Exchange, otherwise known
as the CME, launched futures trading in seven currencies.
In 1974, the first gold futures contract was traded on the COMEX exchange
in New York. Everybody likes some fun in their life,
so I've brought you some fun facts that I found interesting
personally about gold that I wanted to share with everyone.
Number one is that Antarctica is the only continent where
gold is not mined, and this is not because there is no gold
there, there actually is, but because of the Antarctic Treaty,
which among other things, prohibits mining in the region.
Long story short, we do have gold in Antarctica, but it's not
allowed to be mined. Number two is, due to its rarity, talking
about gold, and virtual indestructibility,
all the gold that has been mined throughout history still
exists to this day, being melted and remelted, and used over
and over in different forms.
You may be surprised to learn that the United States, as much
as we love our gold here,
we are actually the fourth top producing country.
We fall behind China, Australia, as well as Russia. Also, aside
from its monetary and symbolic value, gold is also used in
electronics, radiation shielding, dentistry, embroidery, as well
as coloring glass. It has a lot of practical purposes
aside from just building a large throne to sit upon. Also,
gold falls under the category of noble metals, meaning it
is relatively unreactive to air, moisture, and most solvents,
which adds to its "indestructible" tendencies.
Next we're going to go ahead and jump into our car here and
learn about some of the driving factors,
(see what I did there) along the gold price highway. The price
of gold fluctuates every day,
but the starting point is typically coordinated through the
London Bullion Market Association, which is known as the
LBMA, and usually it's referred to as the London Fix.
If you remember the London Fix, you'll be doing yourself
a good deed. At 10:30 and 3 p.m.
London time every business day, a large consortium of large
financial organizations that deal in major bullion purchases
and sales set the starting trade 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.
Here, we have a graph that represents the relationship between
the supply, the supply demand and balance, the demand, and the
gold spot price. Where the gold spot price is going to be
the line that's traveling along the chart and the others
are going to be the color coded boxes.
Take a moment to soak this in, or pause the video if you want
to soak up this as well, to get an idea of how the spot price
is tied to the supply demand, as well as the supply itself.
Of course gold can be traded, but here at Earn2Trade,
our favorite way to trade gold is going to be through futures.
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. Hopefully
you look like this guy here and you're having a good time
when you get your delivery and price is now at a higher point
than when you purchased it. The COMEX officially began trading
gold futures contracts in 1974, as we mentioned earlier on,
making it one of the oldest exchanges for this particular
asset, as well as the largest.
Here we have some contract specifications for a COMEX gold
futures contract. The product symbol will be GC if you're loking for it folks.
The contract size is going to be 100 Troy ounces.
The price movement will be a minimum of 10 cents per Troy
ounce, and the price quotation obviously will be U.S. dollars
and cents per Troy ounce. Settlement method will be physical
delivery, although it is very uncommon for a futures trader
to take physical delivery of a gold contract.
The trading hours are going to be nothing crazy here.
We're going to be Sunday at 6 p.m. to Friday at 5 p.m.
We also have a 60 minute break each day beginning at
5 p.m. or 4 p.m. Chicago time.
Continuing down our contract specification sheet as far as
the trading months in terms of availability,
there are 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.
As far as delivery, delivery may take place on any business
day beginning on the first 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.
That's a lot of fun to read when you get into the futures
contracts, they are always a joy. The termination of trading
occurs at 12:30 p.m. Chicago time on the third last business day of the delivery
month. For those of you that are saying, well with the COMEX gold futures
I don't know if micro gold futures, or e-mini gold futures,
or gold kilo futures, or gold TAS futures are enough.
Maybe I want something different, or I want a different contract
option. Well, you're in luck.
There are three other big-name options out there that people
are using, starting with the London Metal Exchange, which
is known as the LME. The LME officially started
trading gold Futures in July of 2017, so relatively recently. Investors
are also provided with gold forwards curve data, allowing
them to have a long-term view of the precious metal here.
Then we have the multi commodity exchange.
This is an Indian exchange that is often favored by investors
who have a smaller capital base, since the contracts offered
here range from 1 gram, 8 grams, and all the way to 1 kilo.
Then finally, we also have the Tokyo commodity exchange.
The contract size on this exchange is typically where one
kilogram per contract is approximately 32.15
Troy ounces, if that is something of interest to you.
For those that are interested in potentially trading gold
futures and moving forward with their gold career,
we have some tips that I'd like to share with you.
My first tip is many successful gold traders strongly recommend
starting with fundamental analysis. Fundamental analysis is
going to be things like paying attention to market sentiment.
This means if the market sentiment of gold is positive, we
may expect gold itself to be currently undervalued, with an expectation
that it might rise. If the market sentiment is negative, and
we are currently looking at gold prices and view them to
be overvalued, then what is naturally expected to happen but
a fall to bring a level of equilibrium back to the market.
Our number two tip is going to be pay attention to all factors
that directly influence the price of gold. This means paying
attention to the central bank's rate of buying and selling
gold. You 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 future.
Lastly, we have number three and that is to keep an eye on Bitcoin.
What is Bitcoin those of you that don't know?
Well, it's a cryptocurrency and it's arguably the most popular
and valuable cryptocurrency out there.
It is often been referred to as digital gold.
Even though at this point it doesn't challenge gold directly,
people do suspect that in the future, Bitcoin could become
powerful enough that it could influence the value of gold
itself. To sum it all up, gold is something that has been
around, and has been traded in one form or another for a very
long time, arguably just about as long as people have had developed civilizations.
It is something that has been sought after for so long for
both its visual beauty, as well as its practical purposes.
Because of these things, it is strongly expected to be something
that will continue to be sought after as we work our way into the future.
As traders, we're always looking for something stable to trade
that still has some type of measurable volatility, and gold
falls into this category.
It is something that we expect to continue to be sought after
for some time, yet is absolutely a volatile market which can
lead to great gains, or even potentially great losses for
someone that is caught off guard. In the meantime guys,
I hope you do some more research on gold because it is a fascinating subject.
Thank you for joining me again for another
Survival Guide episode, this time covering gold futures.
I look forward to seeing all of you in the next one.
Please make sure you click the like and subscribe button below, but
until next time everybody, cheers, happy trading, and over and out.