A Tutorial On Trading the Metals Futures Market

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The metal commodity market is one of the most widely traded markets in the world. And within this group gold and silver are among the most liquid instruments. There are a few major venues for trading metal commodities. This includes the spot Forex market for trading gold and silver, the equities market for investing in individual mining companies, and specific metal commodity ETFs. Additionally, traders can access metal commodities through futures market exchanges. Our discussion here will focus on how to trade the metal commodities via the futures exchanges.

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Metal Futures Trading

A metal futures contract is an agreement for the delivery of a specific metal at a pre-agreed price, into the future. The five primary products within the metal futures market include gold, silver, copper, platinum, and palladium. Of these, the gold and silver precious metals futures tend to be the dominant trading instruments with the highest amount of volume and open interest. There are several prominent sites that provide metal futures prices, and volume and open interest data on their websites. Two such websites include Kitco, and Bloomberg.

Gold and Silver trading has a long history dating back many thousands of years before the advent of modern financial markets and centralized exchanges. These precious metals represent a real store of value or real money in the economy. These timeless assets are not adversely affected by the whims of central banks, and their money printing policies.

One of the major advantages of trading within the futures market is that a futures exchange, such as the CME, creates standardized contracts, making it easier to transact in the market, and without fear of counterparty risk. There are many different players within the metals futures market. And each has a specific goal for engaging in the metals markets. The three primary class of traders that participate in the metals futures market include Commercials, Large speculators, and Small speculators.

Commercials are typically large manufacturers, producers or users of a metal commodity, and their primary purpose is to hedge price risk. Large speculators are generally hedge funds, and commodity trading advisors that manage funds of institutional investors and wealthy private investors.

Their primary motive in the futures market is one of market speculation. Finally, the small speculators represent the retail trading public. These are typically individual mom-and-pop investors seeking to profit from price movements within the market. As such, they are also considered market speculators similar to the large speculator class.

There are a host of advantages to trading precious and non-precious metals via the futures market. One of the more obvious benefits to trading in the futures market is that there is more transparency compared to some other markets, such as the spot Forex market. Because of this the price discovery process is much more organized and fairer.

Additionally, the metal futures market offers a great deal of leverage capacity to traders. When you trade metals through a futures exchange, you will typically enjoy much higher leverage then you could get compared to other markets, particularly the stock market. Within the stock market, there are plenty of metal ETF’s to choose from, however, you will enjoy only a 2 to 1 leverage limit in most cases. Contrast that with the metal futures market where you may have access to 15 to 1 or 20 to 1 leverage or more depending on the volatility of the market.

Another reason for trading metals through futures exchanges is that within the futures market, traders can go short, just as easily as they can go long the market. As such, you can profit from price movements in either direction. Although this can be done within the equities market, there are certain rules and built-in inefficiencies that makes taking a short position quite difficult to do at times, especially as it relates to the US equities market.

Gold Futures Trading

Gold is the most widely watched precious metal commodity in the world. Gold has many uses as a commodity. It is most well-known for its use in jewelry products. But in addition to that, gold is also utilized in other industries such as electronics and reflective glass. Gold has certain qualities that make it an extremely durable metal, which can sustain extreme heat or moisture. The largest producers of gold include the United States Australia, and China.

Before 1971, the United States was under what is commonly known as the gold standard. That is to say that under this system, all US dollars in circulation were backed up by physical gold in storage vaults. This provided confidence for the US dollar as a reserve currency. But, in 1971, Pres. Richard Nixon did away with the gold standard, allowing the US dollar to float freely.

The standard contract for gold futures traded through the Chicago Mercantile Exchange is set at 100 Troy ounces. Additionally, the CME offers a micro gold futures contract. This micro contract is 1/10 the size of the standard contract, and as such is standardized at 10 Troy ounces.

The symbol for the standard gold contract at the CME is, GC. It is traded via the following mediums – CME Globex, CME Outcry, and CME ClearPort. The CME Globex platform is the most widely utilized gold futures exchange platform among these. The hours for trading the GC contract via the CME Globex platform is Sunday to Friday from 5 PM to 4:15 PM central time. And there is a 45 minute break from 4:15 PM to 5 PM.

The minimum fluctuation for the GC futures contract is $0.10 per troy ounce. In other words, each tick is valued at $10. This is calculated by taking the standard contract size of 100 Troy ounces and multiplying by the minimum fluctuation of $0.10 per troy ounce, resulting in a value of $10 per tick.

Because the gold futures market is extremely liquid and offers relatively high average daily volatility, it is a popular venue for day traders. Those interested in day trading gold futures at the CME can do so using the standard GC contract, or the MGC micro contract.

The short-term trader should be aware that the bid ask spreads on the standard GC contract would generally be better than those seen on the micro MGC contract. Regardless, those traders that are working with a limited capital base can take advantage of price moves in the gold market by trading the micro contract.

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Silver Futures Trading

Along with gold, silver is the most sought after metal in the world. Silver has a great many applications and is used in different industries including jewelry, electronics, dentistry, automotive, and more. It has long been considered a store of wealth, and a hedge against fiat currencies and inflation. In the early days of the United States, the government implemented the silver dollar within its monetary system. Silver is produced around the world throughout many continents, however, the biggest producers of silver include the United States, China, and Mexico.

Due to the many industries that rely on silver as a component of their product line, there is a substantial amount of hedging activities that occurs in the silver futures market. Commercial hedgers are able to reduce or manage certain price risks by using silver futures contracts.

For example, a large commercial jewelry manufacturer could use the silver futures market to lock-in a perceived low price today in anticipation of higher prices in the future. Doing so allows them to maintain a specified cost for the silver component within their jewelry products. This is because in case the price of silver increases going forward, their purchase of silver futures contracts today allows them to take delivery in the future based on today’s specified futures price.

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The standard contract for silver on the COMEX exchange, which is part of the CME

Group, consists of 5000 Troy ounces. Additionally, there is a E-mini silver contract available as well. The E-mini silver contract is half the size of the standard contract for silver. As such, the E-mini silver contract consists of 2500 Troy ounces. Finally, the CME also offers the micro silver futures contract, which is 1/5 the size of the full silver contract. The micro silver contract is standardized at 1000 Troy ounces. As such, there are quite a few choices for trading silver futures based on your account size.

The standard contract for silver trades with the symbol SI at the CME. SI can be traded on the CME Globex, CME ClearPort, and Open outcry. The most popular platform for trading the SI silver contract is the CME Globex. The CME Globex session runs from 5 PM to 4:15 PM central time, Sunday to Friday, with a 45 minute break starting at 4:15 pm.

The minimum price fluctuation for the SI contract is $0.005 cents per troy ounce. As such, the minimum tick value for the SI contract is $25. This is calculated by multiplying the standard silver contract size of 5000 Troy ounces by the minimum fluctuation of $0.005 cents.

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Copper Futures Trading

Copper is one of the most widely traded non-precious metals on the globe. Copper is a major commodity utilized within the construction industry. Additionally, copper is an integral component within many electrical based systems. The largest producers of copper include Chile, China, and Peru. There is a large percentage of commercial hedgers that participate within the copper futures market.

The standard copper futures contract traded to the CME consists of 25,000 pounds of copper. The contract is traded under the symbol HG. HG can be traded via the CME Globex, CME ClearPort, and Open outcry. The CME Globex is the most popular venue for trading HG copper futures. HG copper futures trade between Sunday and Friday from 5 PM to 4:15 PM central time. There is a 45 minute break between 4:15 PM and 5 PM daily.

The minimum price fluctuation for an HG contract is $0.0005 cents per pound. As such, the minimum tick value is $12.50. This is calculated by multiplying the standard contract unit of 25,000 pounds by the minimum fluctuation of $0.0005 cents per pound, resulting in the minimum tick value of $12.50.

Aside from trading copper futures through the CME, traders can access the copper futures market via a few other venues. The best alternative to the CME is the London Metal Exchange, LME. At the LME, the standard unit is 25 tonnes, which is equivalent to just over 55,000 pounds.

There is a good deal of liquidity in both the CME copper contract, and the LME copper contract. But, since the volume is not as high as you would find within the gold futures are silver futures contracts, copper tends to attract more intermediate swing traders and longer-term position traders rather than day traders.

Palladium Futures Trading

Palladium is an important metal that is used extensively in the automobile industry and the electronic sector. The largest producers of palladium include the United States, Canada, Russia, and South Africa. Palladium is a similar metal to platinum in many regards. The interest in this metal from the production and trading perspective has increased steadily over the years. Much of this can be attributed to the economic expansion seen in developing countries, particularly China and India.

Unlike gold and silver, which are mined metals, Palladium is a man-made metal. Along with its many uses in automobile production, it is also used regularly in the manufacturing of jewelry. Due to its being an integral component within automobile production, the metal is closely tied to global vehicle demand.

The standard Palladium contract traded through the CME has the symbol, PA. It can be traded via CME Globex, CME ClearPort, and Open outcry. The trading hours for the CME Globex is Sunday to Friday from 5 PM to 4:15 PM central time, with a 45 minute break running from 4:15 PM to 5 PM.

The CME Palladium futures contract, PA, has a standard contract size of 100 Troy ounces. The minimum fluctuation for the PA contract is $0.50 cents per troy ounce. This equates to a minimum tick value of $50.

Platinum Futures Trading

Platinum is a truly versatile metal that has a multitude of different applications. Along with palladium, the two primary uses a platinum include the creation of jewelry, and the production of automotive parts. Although platinum does have its fair share of market speculators, it is a market that is somewhat dominated by commercial hedgers.

Along with gold, platinum is considered the rarest metals in the world. The largest supplier of platinum is South Africa, with an astonishing three quarters of the platinum mines based in that region. Along with South Africa, the United States, Canada and Russia also are large producers of platinum.

The standard contract for platinum futures traded via the CME consists of 50 Troy ounces. The symbol for the CME platinum futures contract is PL. It can be traded via CME Globex, CME ClearPort, and Open outcry. The trading hours for platinum through the CME Globex platform is Sunday to Friday 5 PM to 4:15 PM central time with a 45 minute break between 4:15 PM and 5 PM.

The minimum fluctuation for the PL contract is $0.10 per troy ounce. As such, the minimum tick value equates to $5. This is calculated by multiplying the PL contract size of 50 Troy ounces by the minimum fluctuation of $0.10 per Troy ounce, resulting in a value of $5 per tick.

Aside from the CME, traders can also opt to trade platinum futures on various other global exchanges. This includes the MCX, which is the Multi Commodity Exchange based in Mumbai, India. The standard contract size for platinum trading on the MCX is 250 grams, which is smaller than the standard contract unit at the CME.

The Tokyo Commodity Exchange, TOCOM also offers a good venue for trading platinum futures. The standard platinum contract at the Tokyo Commodity Exchange consists of 500 grams. They also offer a smaller mini platinum futures contract which has a standard contract size of 100 grams.

Download the short printable PDF version summarizing the key points of this lesson…. Click Here To Download

Summary

The futures market is an excellent venue for trading the metal commodities. We described some of the most important contract specifications for gold, silver, copper, palladium, and platinum that are traded through the CME group. Additionally we described some of the advantages of trading instruments through the futures market compared to some other markets such as the spot Forex market, and the equities market.

If you’re interested in pursuing commodity metal futures trading, the first step would be to find a reputable futures trading broker. There are quite a few US-based futures brokers to choose from. Some of the more reputable names that offer discounted rates on futures trading products include Amp Futures, Ninjatrader Brokerage, and Interactive Brokers. Amp Futures and Ninjatrader brokerage tend to be more beginner friendly compared to Interactive Brokers.

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