What are Gold Futures Contracts and how do they work?

Gold Futures Contracts - (n) legally binding agreements for the potential delivery of physical gold at an agreed-upon price in the future (although in the vast majority of gold futures contract trades, physical gold is never exchanged between trading parties, merely fiat currency is used for contract settlement).

All gold futures contracts are standardized by a respective futures exchange on which they are traded.

Gold futures contracts are explicit and enforced by clearing houses and commodity futures exchanges with the quantity of gold each futures contract represents, the quality of gold purity and form used in delivery, and the time and place of potential physical delivery (e.g. approved futures exchange warehouses, etc.).

On gold futures contract exchanges, only the fluctuating price is a variable, all other future exchange rules should remain constant (in theory).

Formal futures contract markets have been active for many millennia (dating as far back as The Code of Hammurabi).

The original intention of futures contracts was to give the producers of commodities (e.g. gold miners) and end users (e.g. gold refiners or bullion dealers), and commodity price speculators (those who simply trade on futures exchanges for short term gains) ways to respectively manage their price risk, buy and potentially take actual delivery of the real world goods, or simply to make bets on a commodity’s price movement up or down in the near future.

With gold futures contracts only two different positions can be taken: a long position (buy) is an obligation to accept delivery of the physical metal, while a short position (sell) is the obligation to make future delivery if called upon. Again though, the great majority (+99%) of gold futures contracts are offset or settled in fiat currency prior to the actual delivery date.

A commodity futures contract price is based on the ongoing price discovery for optional future delivery of that particular commodity (as mentioned they are most often settled in cash, while sometimes futures contracts are actually settled in the real world tangible good based on the stated contract’s explicit quantity). On the COMEX for instance, gold futures contracts represent 100 troy ounces of fine COMEX approved deliverable gold.

Private US citizens were not allowed to own more than 5 troy ounces of gold bullion for four decades of time in the 2oth Century. Spanning from 1934 to 1974, private gold saving was disallowed in bulk in the USA. The following was a political effort put forth in the early 1970s to reallow private US citizens the 'right' to again save gold bullion in bulk. 

Gold Futures Contract Trading vs Physical Gold Bullion SD Bullion SDBullion.com

The CME Group’s COMEX gold futures contract trading began in 1975 and recent US Treasury cable documents released by Wikileaks have given gold manipulation allegations more credence than ever. The documents allude that COMEX gold futures contract trading was intentionally set up to bring outsized price volitility to the US dollar gold price and thus discourage average US citizens from buying gold bullion in mass (i.e. mission accomplished).

COMEX gold futures trading US Treasury Cables use gold futures contracts to discourage US citizens from owning gold bullion in mass SD Bullion SDBullion.com

The following charts show the amount of gold bullion held throughout the fractionally reserved gold futures trading COMEX exchange history.

In 2017 alone, an average of 335,000 gold futures contracts representing 33.5 million ounces of gold were traded on a daily basis on the COMEX.

With about 250 trading days in a year, that is about 83.7 million gold futures contracts traded in 2017. In other words, about $10.5 trillion USD in gold futures contracts moving through the COMEX in 2017 with about 100x less in underlying COMEX warehouse gold bullion backing it all.

COMEX registered gold owners per ounce June 2018 SD Bullion SDBullion.com

COMEX Gold Futures Trading and Warehouse Inventory vs Physical Gold Supply - What are Gold Futures Contracts and how do they work SD Bullion SDBullion.com Gold derivatives vs gold supply

Commodities like gold (and silver, oil, natural gas, palladium, platinum, coffee, sugar, cotton, wheat, and others) have standardized forward contracts traded on their fluctuating values. Also call futures contracts, these and other commodity futures contracts are listed on various futures contract exchanges throughout the world.

There are many futures contract exchange market acronyms like the NYMEX, CME Group, CBOT, SGE, COMEX, and more. Futures contract exchanges are purportedly regulated by their national governmental or semi-governmental regulatory agencies.

Today the gold spot price is a combined indexing using many of the world futures market prices. But based on trading volumes, the gold spot price is currently mostly influenced by the highly fractionally reserved COMEX and London Gold Market.

Gold derivatives (gold futures contract bets) are traded in daily volumes which dwarf the daily physical gold bullion supply. Basically 100s of theoretical gold ounces are traded versus 1 real ounce of physical gold brought to market every day.

The following charts give you an illustration of these points using various gold futures contract trading volume data vs physical gold supply data.

Global Gold Futures Trading vs Physical Gold - What are Gold Futures Contracts and how do they work SD Bullion SDBullion.com Gold derivatives vs gold supply

Global Gold Futures Trading vs Physical Gold Supply - What are Gold Futures Contracts and how do they work SD Bullion SDBullion.com Gold derivatives vs gold supply

The fluctuating gold spot price of which you often see quoted on bullion dealer websites and in the financial media, is actively determined by a gold futures most highly traded futures contract at the time. The most traded futures contract can be the current month or it might be two or more months into the future. Thus you can think of the gold spot price like so:

Gold Spot Price – (n) the current notional price of 1 troy ounce of fine gold available for immediate delivery before being minted into an investment grade gold bullion product (e.g. gold bar, gold coin).

As backwards as it may sound, the price of physical gold today is mostly found via the selling and buying of gold futures contracts representing the underlying potentially deliverable physical precious metal itself.

If you want to learn more about gold and other precious metals be sure to visit our 21st Century Gold Rush page where you can pick up a free PDF eBook.

Thanks for visiting us here at SD Bullion.


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James Anderson
James Anderson
Content Director

A bullion buyer years before the 2008 Global Financial Crisis, James Anderson is a grounded precious metals researcher, content creator, and physical investment grade bullion professional. He has authored several Gold