How much would it cost me to buy one gold futures contract on Comex?

Question

I am looking at gold futures prices: http://www.cmegroup.com/trading/metals/precious/gold.html

I cannot figure out how much one futures contract of gold would cost me to buy if I were to buy it from a broker. I do not have any broker yet or even access to a broker to ask these kinds of questions. I want to understand gold trading, but I need to get past these questions first.

Suppose that, at the time I sell the futures contract, the price of gold is the same as when I bought the contract. Do I lose or make money?

Suppose that the price of gold increases $500 per ounce. How much money would I make in one futures contract?

Suppose that the price of gold decreases $500 per ounce. How much money would I lose in one futures contract?

Answer 1

When you buy a futures contract you are entering into an agreement to buy gold, in the future (usually a 3 month settlement date). this is not an OPTION, but a contract, so each party is taking risk, the seller that the price will rise, the buyer that the price will fall. Unlike an option which you can simply choose not to exercise if the price goes down, with futures you are obligated to follow through. (or sell the contract to someone else, or buy it back)

The price you pay depends on the margin, which is related to how far away the settlement date is, but you can expect around 5% , so the minimum you could get into is 100 troy ounces, at todays price, times 5%. Since we're talking about 100 troy ounces, that means the margin required to buy the smallest sized future contract would be about the same as buying 5 ounces of gold. roughly $9K at current prices.

If you are working through a broker they will generally require you to sell or buy back the contract before the settlement date as they don't want to deal with actually following through on the purchase and having to take delivery of the gold.

How much do you make or lose?

Lets deal with a smaller change in the price, to be a bit more realistic since we are talking typically about a settlement date that is 3 months out. And to make the math easy lets bump the price of gold to $2000/ounce. That means the price of a futures contract is going to be $10K Lets say the price goes up 10%, Well you have basically a 20:1 leverage since you only paid 5%, so you stand to gain $20,000.

Sounds great right? WRONG.. because as good as the upside is, the downside is just as bad. If the price went down 10% you would be down $20000, which means you would not only have to cough up the 10K you committed but you would be expected to 'top up the margin' and throw in ANOTHER $10,000 as well. And if you can't pay that up your broker might close out your position for you.

oh and if the price hasn't changed, you are mostly just out the fees and commissions you paid to buy and sell the contract.

With futures contracts you can lose MORE than your original investment. NOT for the faint of heart or the casual investor. NOT for folks without large reserves who can afford to take big losses if things go against them. I'll close this answer with a quote from the site I'm linking below

The large majority of people who trade futures lose their money. That's a fact. They lose even when they are right in the medium term, because futures are fatal to your wealth on an unpredicted and temporary price blip.

Now consider that, especially the bit about 'price blip' and then look at the current volatility of most markets right now, and I think you can see how futures trading can be as they say 'Fatal to your Wealth' (man, I love that phrase, what a great way of putting it)

This Site has a pretty decent primer on the whole thing. their view is perhaps a bit biased due to the nature of their business, but on the whole their description of how things work is pretty decent.

Investopedia has a more detailed (and perhaps more objective) tutorial on the futures thing. Well worth your time if you think you want to do anything related to the futures market.

Answer 2

Brokers usually have this kind of information, you can take a look at interactive brokers for instance: http://www.interactivebrokers.co.uk/contract_info/v3.6/index.php?action=Details&site=GEN&conid=90384435

You are interested in the initial margin which in this case is $6,075. So you need that amount to buy/sell 1 future. In the contract specification you see the contract is made for 100 ounces. At the current price ($1,800/oz), that would be a total of $180,000.

It is equivalent to saying you are getting 30x leverage.

If you buy 1 future and the price goes from $1,800 to $1,850, the contract would go from $180,000 to $185,000. You make $5,000 or a 82% return.

I am pretty sure you can imagine what happens if the market goes against you.

Futures are great! (when your timing is perfect).

Answer 3

The lot size is 100 troy ounce. See the contract specification at the same site;
http://www.cmegroup.com/trading/metals/precious/gold_contract_specifications.html

So with the current price of around $1785, one lot would cost you around 178,500. There may be other sites that offer smaller lots you would need to check with your broker. if the price moves up by $500, you gain $50,000 for a lot.

The margin required changes from time to time:

Currently it's $3666, with a maintenance of $3332, so a drop of $3.34 per oz of gold will cause a margin call. You make or lose 100 times the per oz movement as there are 100oz in the contract you cited. There's also a broker fee analogous to the commission on a stock trade.

The other option would be to buy a fund that invests in Gold, this will be more easier to buy and the lot sizes will be much less.

I hope you jumped into this great opportunity. At the time, experts said gold would have a straight run to $5000.

Answer 4

In order to understand how much you might gain or lose from participating in the futures markets, it is important to first understand the different ways in which the slope of the futures markets can be described.

In many of the futures markets there is a possibility of somebody buying a commodity at the spot price and selling a futures contract on it. In order to do this they need to hold the commodity in storage. Most commodities cost money to hold in storage, so the futures price will tend to be above the spot price for these commodities. In the case of stock index futures, the holder receives a potential benefit from holding the stocks in an index.

If the futures market is upward sloping compared to the spot price, then it can be called normal.

If the futures market is usually downward sloping compared to the spot price then it can be called inverted.

If the futures market is high enough above the spot price so that more of the commodity gets stored for the future, then the market can be called in contango.

If the futures market is below the point where the commodity can be profitably stored for the future, and the market can be called in backwardation.

In many of these cases, there is an implicit cost that the buyer of a future pays in order to hold the contract for certainly time.

Your question is how much money you make if the price of gold goes up by a specific amount, or how much money you lose if the price of gold goes down by the same specific amount. The problem is, you do not say whether it is the spot price or the futures price which goes up or down. In most cases it is assumed that the change in the futures price will be similar to the change in the spot price of gold. If the spot price of gold goes up by a small amount, then the futures price of gold will go up by a small amount as well. If the futures price of gold goes up by a small amount, this will also drive the spot price of gold up. Even for these small price changes, the expected futures price change in expected spot price change will not be exactly the same. For larger price changes, there will be more of a difference between the expected spot price change in expected future price change.

If the price eventually goes up, then the cost of holding the contract will be subtracted from any future gains. If the price eventually goes down, then this holding cost should be added to the losses. If you bought the contract when it was above the spot price, the price will slowly drift toward the spot price, causing you this holding cost. If the price of gold does not change any from the current spot price, then all you are left with is this holding cost.