Gold Futures: Price and Trading Strategies to Know | tradeTALK Series
Apr 7, 2021
By: Katie McGarrigle
Gold futures are some of the most liquid and widely traded futures contracts out there. However, hearing the word “futures” is often intimidating to new investors due to their leverage and associated notional values. Katie McGarrigle aims to take the fear out of futures trading while also demonstrating the benefits of incorporating Gold futures into a portfolio in a way that caters to each trader’s account size, risk tolerance, and familiarity with metal price dynamics.
Before getting into the specifics of trading gold futures, what are futures products in general? Futures products are a trading vehicle that is an agreement to buy or sell a particular asset at a predetermined price and time in the future. Each futures contract is also “standardized” in terms of contract size, value, minimum price fluctuation, and expiration date.
These products are leveraged, meaning that traders can get exposure to a commodity, currency, index, etc. without having to put up the entire amount at risk (also known as notional value). Leveraged products are often helpful to traders to hedge risk in a portfolio or those looking to boost their return on capital.
Additionally, there are other benefits of trading futures, which include:
Pure Market Exposure
No Dividend Risk & Less Risk of Assignment
Access to liquid markets
23 Hour Trading Access
Potentially preferable tax treatment
No Pattern Day Trading Rules
Not only that, but diversifying the products in a trading account has been shown by tastytrade research to reduce volatility in profits/losses and reduce correlation risk with a benchmark product like SPY or SPX.
Given that futures trading involves controlling large contract sizes, it is often seen as a vulnerability for those trading in smaller portfolios. However, with the broader availability of mini, micro, and “smalls” products, traders with limited capital can now participate, as the smaller contract sizes often demonstrate smaller swings in profit/loss as well as require less buying power to maintain a position.
While all of these benefits are excellent for margin accounts, can futures be traded in an IRA? The short answer is yes IF you have a trading account at certain brokerage firms. Depending on the type of IRA and the account balance, traders can enable CME Group and Small Exchange Futures products, sell uncovered call options, and more.
Only the following activities are not allowed in a Retirement Account:
No overnight leverage / no borrowing
No short selling stock
No debit balances
No cryptocurrency trading (at this time)
That said, there are plenty of opportunities for IRA traders to successfully incorporate gold into their portfolio using a variety of strategies (some of which are below).
As mentioned earlier, expanding reach beyond just one or two types of products or sectors reduces correlation risk and sensitivity of portfolio returns. Traditionally in the futures space, there are six main asset classes used to broaden exposure. These are:
Currencies (Foreign Exchange)
Each individual asset class has its own set of price drivers and relationships to other products within and outside of each class.
Trading Metal stocks, ETFs and futures expose traders to precious metals like Gold, Silver, and Platinum, but also to more industrial metals such as copper and palladium. And as shown in the correlation matrix above, the 3 month correlation between products in the six major asset classes is fairly low at this time (a correlation of 0 indicates no price relationship), making the diversified portfolio all the more attractive.
Since gold has been seen historically as a currency, there are many dynamics that can push and pull the price of gold worldwide. For that reason, there are hedgers and speculators with conflicting interests to impact the value of Gold futures contracts.
Given its long-term association with financial markets, there are a variety of catalysts that can influence the price of gold-related products like futures and ETFs.
Common price drivers include changes in political or economic stability, shifts in monetary policy, inflation and deflation, and of course, supply and demand. With this in mind, traders often keep an eye on Equity Indices, Bonds and Interest Rates, and Currencies, as these products will have shifting relationships with one another depending on binary events and reports, economic, political, and market strength, and more. All of these factors impact gold volatility and pricing.
Now that there’s an understanding of gold price performance factors, it’s time to get into the nitty gritty of the yellow metal’s various trading vehicles.
CME Group’s “major” Gold contract’s symbol is /GC. The contract represents 100 troy ounces and it trades in dollars and cents per ounce. It’s minimum tick size (or minimum price fluctuation) is 0.10 and each tick is valued at $10.
Therefore, if a trader purchases a /GC contract at 1,745.00 and the price of /GC climbs to 1,745.30, the trader will have made $30.00 (.30 = 3 ticks x $10 = $30 profit).
Major Gold Futures (/GC) have the heaviest volume in February, April, June, August, October, and December. CME Gold Futures trade with 23 hour access from 5pm CST- 4pm CST the following day with a 60 minute break.
CME Group’s Gold Futures are a physically deliverable commodity, but very rarely do expired futures products go through the delivery process.
In terms of smaller sized gold products, there is also a micro gold future coming in at 1/10th the size with ticker symbol /MGC. Therefore, traders can simply divide the previous major GC contracts by ten or check out the image below for further information.
Last but not least, the Small Exchange has a metal future that not only consists of gold, but also silver and platinum. Its contract symbol is /SPRE and its contract multiplier is 100 multiplied by the index price. Small Exchange products are cash settled, and they trade in .01 increments with a tick value of $1.
As an example, if /SPRE is purchased at 72.24, and the price increases to 73.24, the trader’s profit would be $100. Small exchange products trade monthly and expire on the third Friday of every month. Unlike /GC and /MGC, Small Precious Metal contracts do not trade 23 hours a day at this time, but have trading hours from 7am CST until 4pm CST.
Understanding the products is the first step in adding gold futures to a portfolio. From there, traders can decide on what strategy to execute, six of which are listed and explained below.
Similar to buying or selling stock, buying or selling a futures contract has a 50/50 probability of success; the price of the contract either goes up or down. Traders with a strong directional assumption (either bullish or bearish) or those using gold futures to hedge a physical position may be comfortable with buying and selling outright major, mini, or micro contracts.
Luckily, Gold futures are liquid across the various products, including futures options and small-exchange contracts. To be successful trading outright gold futures, traders must be directionally correct, have a strong sense of their entry and exit points, as well as have the capital available in order to enter and maintain a position. This buying power requirement is also known as “margin.”
Similar to selling or buying the major GC contract, traders of micro gold will have an opinion on which way they want the price of gold to move, but at a fraction of the capital requirement as well as a fraction (1/10th) of the movement. These contracts can also be used to layer into positions at varying price points or to hedge an idea with another gold product or physical gold.
Due to the nature of the Small Exchange’s SPRE Precious metal index, traders buying and selling SPRE should also keep track of Silver and Platinum, as the SPRE contract is composed of 69% gold, 24% silver, and 7% platinum.
Like the micro gold futures, SPRE is capital-friendly for those in smaller account sizes (about $500 in margin at the time of publishing), those who are new to futures trading who are looking to understand the behavior of metals, or those looking to broaden their reach with a product that isn’t just one type of metal.
Since there are no options available on Small Exchange products yet, traders can buy and sell outright SPRE contracts, OR pair SPRE with other trading vehicles like the GLD or SLV ETFs as well as micro Gold and Mini Silver (/SIL) to set up interesting pairs trades based on correlations in metal products.
There are a few different gold ETFs that give traders different exposure. While some ETFs mainly track price changes in the commodity itself, other Gold related ETFs consider mining and extraction and companies that specialize in the yellow metal.
Three major gold ETFs that are focused on at tastytrade are GLD, GDX, and GDXJ. These products all have varying price points and relatively liquid options markets.
That said, using a gold ETF to emulate a futures position becomes very capital intensive. In order to get the same exposure in GLD as a trader can in /GC, 1100 shares of GLD would need to be purchased.
If GLD is trading at $166/share, that’s a buying power requirement of $90,000 compared to the $12,000 required for a Gold futures contract, making /GC the more capital efficient play.
At tastytrade, incorporating high probability trades into a portfolio is the name of the game. Setting up trades using options allows traders to avoid the 50/50 probability of success when trading outright contracts (as mentioned above) and improve the likelihood of profit while reducing cost basis and enhancing breakeven points.
Gold (/GC) futures options are a liquid trading vehicle, which helps reduce slippage when entering and exiting a trade. Just like in equity options, many of the tastytrade options trading basics apply to futures options as well. These mechanics include selling option premium in high volatility, establishing trades around 45 days until expiration, rolling trades around 21 DTE, and managing winning trades before they reach maximum profit.
Due to the leverage of futures and futures options, traders should be mindful of their trade size and stick to options trading strategies that fit their account size and risk tolerance. For example, if a trader is new to /GC futures options but is comfortable with selling Naked Puts in a Gold ETF, they may instead get their feet wet with a defined risk, Short Put Vertical Spread instead to keep buying power low and maximum loss at a comfortable level.
Last but not least, there are trading strategies that incorporate the relationship between the metals. Pairs trading refers to trading the correlation (or breakdown in correlation) between two or more products.
The most common pairs trade in the metals world is the Gold-Silver Ratio. This is the amount of ounces of Silver it takes to purchase 1 ounce of Gold. If a trader wants the ratio to increase, they would be looking to sell Silver and Buy Gold. If a trader wants the ratio to decrease, they would buy silver and sell gold.
Traders can use a variety of products to make this pairs trade; they can use outright futures like /GC and /SI, mini/micro contracts like /MGC and /SIL, utilize futures options, add in GLD or SLV ETFs, or a combination thereof.
More recently, traders can also set up pairs with the Small Exchange’s Precious Metal Index, /SPRE, with other available metal products.
Gold futures are a liquid, accessible, and size-flexible way to add diversity and boost occurrences to a trading portfolio. There’s a gold trade for every account type, economic/political environment, and skill level! Learn more about trading gold and other metal futures on tastytrade.com
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
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