The futures markets thus
offered an entirely new concept of gold; it was something to trade, on which
to make money; not just a metal to be used in jewellery or physically hidden
away as coins
or small bars against a crisis.
Most trading is by open
outcry throughout
the working hours with specific pits
for each commodity on the exchanges and
most floor
brokers limited
to trading specific pits. Although a number of futures exchanges dealing in
other commodities and financial products have switched to electronic or screen-based
trading, in the gold market this has been limited to the BM&F (Brazilian
Mercantile and Futures Exchange), which offers an electronic trading system
alongside open outcry. Much of the trading is by
hand signals. The hand pushing forward, five fingers outstretched, means selling
five contracts; beckoning means buying. Abbreviations abound: ‘Sell 2 August
at market’ means ‘sell two August lots at the current market price’; ‘Sell 1
December 285 stop’ means ‘sell one December contract if the price falls to $285’.
The techniques of futures trading have also evolved their own language such
as market
order, stop order,
straddle
and switch.
The premium
or contango
on a futures contract will comprise notional costs of storage and insurance
(perhaps 0.5 per cent) plus the financing costs for gold over the agreed months
to delivery, which will vary with interest rates but might typically be 9-10
per cent on an annualized basis. Most exchanges have six delivery
months,
usually February, April, June, August, October and December.
Futures exchanges normally
have separate clearing
houses
which match and monitor all turnover and keep track of additional margin
that must be posted according
to daily price movements.
Futures
Markets/How They Work
The attraction of gold futures, whilst on the one hand providing miners with a means of hedging their forthcoming production and on the other of offering refiners or jewellery manufacturers the chance of hedging their inventories, was
that it provided many other investors or speculators with a cheap and highly efficient
way of getting into gold. And, since most futures contracts are liquidated ahead
of maturity, there are no problems of delivery, insurance, storage or re-assay upon sale that go with the physical
metal. The further attraction is that gold futures contracts can be bought on
margin of as little as ten per cent. This gives the opportunity to 'leverage up' to larger amounts because an initial claim on $1 million in gold can be achieved for as little $100,000.