Pete makes a splash in the metals market by introducing us to gold futures and how you can create a gold/silver spread to play off of volatility.Comparing The Gold ETF (GLD) To Gold Futures (/GC)
Gold futures (/GC) are a great alternative to buying gold bullion, coins, or other mining stocks. One share of the ETF GLD is equal to 1/10th of an ounce of gold, therefore 10 shares of GLD is equal to 1 ounce of gold.
One gold futures contract represents 100 ounces of gold (1,000 shares of GLD is equal to 1 gold futures contract).
There are many benefits to trading gold futures over GLD:
- The volume of contracts traded is much higher (more liquidity)
- The margin requirements are significantly lower (less than $5k* vs $58k*)
- The futures contracts are accessible 23.5 hours/day, GLD is available for 7 hours/day.
- Tax advantages
Gold Futures Specs
Gold Futures (/GC):
Index Multiplier (leverage) - 100
Current Price - $1,170
Notional Value - $117,000* ($1,170 x 100)
Tick Size - .1 ($10.00/tick)
Silver Futures Specs
Silver Futures (/SI):
Index Multiplier (leverage) - 5,000
Current Price - $15.195
Notional Value - $75,975* ($15.195 x 5,000)
Tick Size - .005 ($25.00/tick)
Copper Futures Specs
Copper Futures (/HG):
Index Multiplier (leverage) - $25,000
Current Price - $2.52
Notional Value - $63,087* ($2.52 x 25,000)
Tick Size - .05 ($12.50/tick)
*Values subject to change based on where the market is at
When looking at 1 month correlations, we see that gold, silver, and copper have had little to no correlation, a fundamental breakdown from what is expected.
When looking at the 3 month correlations, we see a high correlation between gold (/GC) and Silver (SI), but still low correlation between those two metals and copper.
The gold/silver ratio will tell you the number of ounces of silver it would take to purchase 1 ounce of gold at a specified date.
If we look at gold and silver prices going back over 100 years or more, the historical ratio is 30 ounces of silver to one ounce of gold (30:1).
Over the course of the last year, this ratio has been at about 70:1 and over the course of the last 3 years, the ratio has fluctuated from about 35:1 all the way up to 85:1.
How do you make a trade based of this information? See the next episode to find out!
Products Discussed In This Episode: /GL, /SI, /HG