A gold and silver futures contract may be of interest to investors seeking alternatives to traditional stocks and bonds. Gold and silver futures contracts can offer a hedge against inflation, speculative opportunities, alternative investment classes, or commercial hedges.

Here, we’ll discuss the basics of gold and silver futures contracts. However, it is important to remember that trading in this market involves substantial risk, which may outweigh the upside returns. Therefore, it is crucial for traders to understand what are futures trading in detail prior to trading.

What Are Gold & Silver Futures Contracts?

A futures contract is a legal agreement to deliver gold or silver at a future date at a predetermined price. The futures exchange standardises the quantity, quality, delivery time, and place of the contracts. The only variable is the price.

These contracts are used by hedgers to manage price risk on physical metal purchases and sales. The futures market also provides speculators with an opportunity to participate in the markets without owning any physical assets.

There are two types of positions: long (buy) and short (sell). The long position implies acceptance of the physical metal, whereas the short position implies delivery. 

Hedgers and Speculators in the Futures Market

Futures markets are primarily designed to provide a centralised marketplace for people who are interested in buying or selling physical commodities sometime in the future. In the cash market, metal futures help hedgers reduce the risk associated with adverse price movements. A hedger can be a bank vault, a mine, a manufacturer, or a jeweler.

Hedgers take positions in the market opposite to their physical positions. In the futures market and spot market, there is a price correlation that can offset gains in one market and losses in the other. For example, if a jeweler fears that gold or silver will rise further, he or she will purchase a contract to lock in a guaranteed price. In the event that gold or silver prices go up, they’ll have to pay more.

Due to their long position in the futures markets, the jeweler could have made money on the futures contract, which would offset the increase in the cost of purchasing gold/silver.

The goal of speculators is not to take delivery but instead to profit by taking on market risk. There are several types of speculators, including individual investors, hedge funds, and commodity trading advisors (CTAs). If a market moves the opposite way, speculators can lose money.

Advantages of Futures Contracts

Due to their centralised nature, futures contracts offer more financial leverage, flexibility, and financial integrity than commodities themselves.

A financial leverage is the ability to trade and manage a high market value product with a fraction of its total value. The trading of futures contracts involves a performance margin, which requires considerably less capital than trading on the physical market. With leveraged investments, speculators can take on higher risk and earn a higher return.

Futures markets allow participants to initiate both long and short positions, giving them a great deal of flexibility. As a result of this flexibility, hedgers can protect their physical positions, and speculators can take positions based on market expectations.

A gold and silver futures exchange’s clearing services eliminate counterparty risks for participants. By acting as a buyer and seller, the exchange reduces the risk of default if either party fails to fulfill its obligations.

The Risks of Trading Gold and Silver Futures

Investors who use futures contracts can increase their returns by leveraging their capital, but their losses may also be amplified. There is a possibility that you will be liable for significant losses and subject to margin calls if gold or silver prices move in the wrong direction. 

Trading futures also requires the careful monitoring of contract expiration dates, with many traders opting to roll forward to longer-dated contracts as their expiration date approaches.

How to Trade Gold and Silver Futures

Trading gold and silver futures will require you to open an account on a platform that allows futures trading. You can trade them on an online share market app. Full-service brokerages usually offer futures trading.

Trading futures markets is similar to trading other types of investments. You need to fund your account and establish a position in a specific futures contract.

Conclusion

Investing in futures contracts is an option for investors looking to add gold and silver to their portfolios. Using futures allows you to leverage your purchasing power without holding the physical metal. However, no matter if you’re a hedger or speculator, remember that trading involves substantial risks and may not be suitable for everyone. Trading futures on gold and silver can provide significant profits. However, keep in mind that futures trading demands a high level of expertise to succeed.