There are two main ways to invest in precious metals: buying physical metal or trading futures contracts.
Futures markets are electronic venues where buyers and sellers trade contracts that commit one party to deliver a specified quantity of a commodity, such as gold, at an agreed price on a future date.
Although futures contracts can result in the delivery of large amounts of physical gold, most trading is short-term speculation. Few traders take physical delivery, because most contracts are closed out before settlement.
Futures trading is complex, costly and risky, and it is dominated by highly experienced professionals. It is generally not recommended for novice investors or for those whose primary goal is capital preservation.
Owning Physical Metal vs. Trading in the Futures Market
Owning physical metals is straightforward: you possess a tangible asset. Historically, metals often move inversely to stocks or local currencies, helping preserve purchasing power during times of currency weakness or market turmoil. The basic approach is to buy when metals are relatively inexpensive and to sell when they have appreciated enough to rebalance your portfolio or protect purchasing power.
By contrast, precious metals futures are complicated and volatile. For many retail investors, futures are an unsuitable vehicle. Our business focuses on physical gold and silver rather than futures because physical metal behaves as a consistent store of value, whereas a single poorly timed futures position can cause severe losses or even bankruptcy.
For those who understand and accept the substantial risks and who seek the added leverage futures provide, the following sections explain how the market works and how futures activity influences retail prices for items such as a 1 oz Gold Eagle.
What Is a Futures Contract?
A futures contract is a legally binding agreement between two parties to buy or sell a specified quantity of a commodity at a predetermined price and settlement date. For simplicity, the focus here is on gold futures, which operate similarly to other precious metal contracts.
All futures trading is tied to the spot price of gold at the contract’s delivery date. The buyer agrees to buy a specified amount at a fixed price on a settlement date (often the last day of a contract month several months out), and the seller agrees to deliver that amount if demanded. Taking a buy position is called going long; taking a sell position is called selling short. Every trade requires one party to go long and one to go short.
In media coverage you may hear references to “short sellers.” That term can refer to two scenarios: traders who borrow a commodity or security they don’t own and sell it purely to profit from a price decline (“naked” shorting), and parties who sell positions they actually expect to deliver or produce by the contract date (covered selling). Short selling, in itself, is not inherently wrong; it is a tool used by a range of market participants.
Many futures positions are placed by miners and other producers to lock in prices before production or shipment, helping ensure revenues will cover expected costs. Historically, such hedging—locking in prices ahead of time—was the primary function of futures markets before speculative trading became prevalent.
Price Discovery
Gold prices move constantly, but daily price benchmarks start with the London Bullion Market Association (LBMA) gold price, often called the London Fix, set at 10:30 a.m. London time on business days. A consortium of major bullion banks sets this price for settling contracts among London market members. An additional evening fix sets an overnight reference. The London Fix functions as an initial daily spot price used widely by markets and media to report gains and losses.
After the fix, prices continue to move with futures market activity. Futures exchanges enable price discovery through competitive bids and offers. The COMEX, part of CME Group, is the primary exchange for gold futures, matching buyers and sellers through standardized contracts that define quality, quantity, delivery location and settlement timing. Changes in futures prices influence the retail spot price consumers pay for physical gold.
Paper Gold
Futures contracts represent claims on metal rather than immediate ownership of physical bullion. One standard gold futures contract covers 100 troy ounces of a minimum specified purity. A silver contract typically covers 5,000 troy ounces. When gold trades at a given spot price, the notional value of a single contract equals that price multiplied by the contract quantity.
Contracts are negotiated and cleared through certified clearinghouses and registered brokers; individual traders must open an account with a clearing member to participate. Although futures markets may report trading volumes equivalent to millions of ounces, only a small fraction of contracts are exercised for physical delivery. Most are offset before settlement.
Who Trades Futures?
Market participants fall into two broad groups: hedgers and speculators. Hedgers use futures to manage price risk—producers, jewelers, and large bullion holders lock in prices to protect margins. Speculators accept risk to profit from price movements, going long when they expect prices to rise or selling short when they expect declines. Speculation can generate large gains but also large losses, especially when retail traders face off against well-funded institutions with sophisticated resources.
Occasionally, large speculators may take delivery of physical metal, as happened in notable historical cases. However, such instances are the exception rather than the rule.
What Is Margin?
Margin is central to futures trading. Traders post a margin—cash or approved collateral—to secure positions. Margin requirements typically range from about 5% to 20% of the contract’s value and serve two purposes: to ensure parties honor contracts at settlement and to cover potential interim losses.
If market moves cause losses that exceed the deposited margin, brokers issue margin calls requiring immediate additional funds or liquidation of positions. Margin magnifies both gains and losses: using a 5% margin lets a trader control 20 times the cash value, so a 1% move in the underlying price can mean a 20% change relative to the trader’s invested cash.
Advantages and Risks of Gold and Silver Futures
Futures offer leverage and flexibility. Small margin deposits allow traders to control large contract sizes, and liquid markets make it easy to open or close long and short positions. However, leverage amplifies risk—both profits and losses can be substantial, and rapid volatility can lead to large, immediate losses.
Hidden Costs
Futures pricing includes financing considerations. The difference between spot prices (for immediate settlement) and futures prices reflects the cost of delaying payment and the relative cost of borrowing dollars versus borrowing metal. When borrowing gold is cheaper than borrowing dollars, futures typically trade at a premium over spot (contango); if borrowing gold is more expensive, futures can trade at a discount. Contango tends to narrow as the contract approaches settlement.
Managing Volatility
Risk controls are widely used to manage futures exposure, including limit orders and stop-loss orders that automatically close positions at predefined prices. While stop-loss orders can protect traders from catastrophic losses, sophisticated market participants can sometimes exploit temporary price moves to trigger these orders and capture favorable fills. Such tactics are usually employed by firms with large resources and the ability to move market prices briefly.
Because of these risks, retail traders should work with experienced brokers and ensure they understand market mechanics before trading futures.
Futures Rollover Psychology
Unlike physical bullion holdings, futures contracts require periodic rollover: positions must be closed and re-established as contracts expire, typically quarterly. That process can create psychological pressure, as traders may focus on short-term results rather than long-term strategy and be forced to re-enter positions at less attractive prices.
Summary
This guide provides an overview of precious metals futures. It is not comprehensive and is not intended as advice to trade futures. Futures markets are generally best suited to well-capitalized, sophisticated and risk-tolerant participants. Most individual investors are better served by including physical gold and silver as long-term holdings to help manage portfolio volatility rather than adding leveraged exposure through futures.