The metals market can be a great way to invest if you are looking for a possible hedge against inflation, a speculative play or a commercial hedge. Trading in this market involves substantial risks and is not suitable for everyone. You should use only risk capital or income that is disposable to you because you can lose the total principal of your investment and possibly more.
A precious metals market futures contract is a legally binding agreement for delivery of gold or silver in the future at an agreed upon price. The contracts are standardized by a futures exchange as to quantity, quality, time and place of delivery. Only the price is interchangeable.
Both Gold and Silver trade on the COMEX division in the New York Mercantile Exchange in downtown NY. Formerly known as the Commodity Exchange Inc., the COMEX merged with the New York Mercantile exchange in 1994 and became the division responsible for metals market trading. These precious metals market trade from 8:20am to 1:30pm NY time.
There are two types of traders, Hedgers and Speculators. Hedgers use these metals market contracts as a way to possibly manage their price risk on an expected purchase or sale of the physical metal. Hedgers take a position in the metals market that is the opposite of their physical position. Due to the price difference between futures and the spot metals market, a gain in one market can potentially offset the loss in the other. For example, a plumber who is fearful that he will pay higher prices for copper would then buy a contract to lock in a guaranteed price. If the market price for copper goes up, he will have to pay higher. However, because the plumber took a long position in the futures metals market, he could have made money on the futures contract, which might offset the increase in the cost of purchasing the commodity. If the cash price for copper and the futures metals market prices both went down, the hedger would lose on his futures positions, but pay less when buying his copper in the cash metals market. Speculators are in the market solely to make a profit and provide liquidity to the underlying commodity. If you didn’t have speculators, there wouldn’t be the tight bids/asks that we see in the metals market today. This would have a huge effect if you were trying to get out of a big position with no liquidity.
Getting “short” is just as easy as getting “long” in the commodity world. To short a commodity, all you have to do is sell it. All commodity accounts are margin accounts. Commodity trading also provides better leverage because you might only have to deposit 10% of the of the total cash value instead of 50% in equity accounts. With great reward comes great risk. You can lose a massive amount of capital if you are not careful.
Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.
