How Are Gold Futures Different From Spot Gold?

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At Orbex.com, traders have the choice of trading either the spot gold or the gold futures markets, or both simultaneously. With the exception of some minor differences in pricing, gold futures, and spot gold markets are entirely the same. As a trader, you might be wondering why there are two instruments tracking the same underlying asset (Gold) and which of these two make for a better trading instrument.

In this article, we outline the main differences between gold futures and the spot gold market as well as spell out the trading requirements and specific characteristics that are unique to each of the two trading instruments. You will also learn the costs involved for both swing and day trading spot gold and the gold futures markets.

 

What are Gold futures and how are they different to the spot gold markets?

Gold futures are merely futures contracts. These are standardized exchange-traded products, cleared via the Commodity Exchange, part of the Chicago Mercantile Group (CME). Gold futures have different expiry months, usually on a 12-serial month with the current month futures contracts being the most actively traded. With gold futures trading, traders who have swing positions are required to roll over their contracts, meaning that once the last trading day of the futures contract approaches, traders need to close out the existing contract and open a trade in the new month’s contract.

In gold futures, the pricing you see is the settlement price at which the buyers and sellers agree to buy or sell the gold futures contracts. The gold futures prices track the prices of the spot gold markets.

When you trade the spot gold markets, the price that you see shows the current market value of the asset. Unlike futures contracts, the spot gold markets are decentralized and trade 24 hours a day, while futures trading has specific open and closing hours.

 

Trading differences between gold futures and spot gold

There are many factors which make gold futures vastly different from the spot gold markets. The following table gives a summary of the trading requirements between the gold futures and spot gold instruments.

Gold Futures Spot Gold
Ticker GC XAUUSD
Minimum Trade size 0.01 (1000 units) 0.10 (10,000 units)
Overnight Swaps? No Yes
Commissions? Yes ($15 per standard lot) No
Spread? Floating Spread (0.1 – 0.2) Fixed Spread (0.3)
Initial Margin $1000 per 1 standard lot $1000 per 1 standard lot
Minimum Tick size 0.10 $0.01
Value $10.00 / tick $10.00 / pip

Between the two instruments, the margin requirements are the same, but that is where the difference ends. Starting from the very basic, which is the minimum lot size to trade, the spot gold markets position can be opened with 10,000 units or 0.10 lots. Whereas, with gold futures, the minimum trade size you can trade with is 0.01 lot or 1000 units. While gold futures attract a commission, the spot gold market is based on the spread.

One of the biggest factors that set apart gold futures from the spot gold markets is the fact that overnight positions can be held only until the last trading day of the gold futures contract which is usually the third last business day of the contract month. Meaning that positions will need to be closed out for the current month contract and traders need to initiate new positions on the new contract month. Keep in mind that in doing so, you would be paying $15 in commissions when you trade the new contract month.

With the spot gold markets, overnight positions can be held for as long as your strategy determines. However, overnight positions in spot gold markets attract overnight negative swaps as well. Although there are no commissions when trading spot gold futures, traders have to pay the spread. At a 0.3 pip fixed spread, this comes to $30 in spread when trading a standard lot in spot gold.

With gold futures, the floating spread of 0.1 – 0.2 ticks translates to $10 – $20 in spread mark up that is an additional overhead on top of the $15 commission.

So what market should you trade? The table below gives a quick overview of the costs incurred with day trading and swing trading gold futures and spot gold markets.

Gold futures v/s Spot Gold Intra day Trading Costs
Gold Futures Costs Spot Gold Costs
Long position at $1150 @ 1 lot Commission: $15 Long position at $1150 @ 1 lot Spread: 0.3 pips
Take profit at $1155 Profit: $500 Take profit at $1155 $500
Net Profit $485  ($500  – $15) Net Profit $500

 

The above table shows that trading the gold futures market on an intra day basis offers you lower costs. With the gold futures, you pay $15 as ‘fees’.

Therefore, for day traders (positions kept during the duration of the day), it is cheaper to trade spot gold. Of course, the variable spreads need to be account for as well, which can vary from 0.1 – 0.2 pips.

Example:

Gold (Futures and Spot) Scalping example
Gold (Futures and Spot) Scalping example
  • Spot gold, sold 1 lot at 1131.31, exit at 1131.72 (0.41) or -$41.00. No commissions involved
  • Gold futures, sold 1 lot at 1132.10, exit at 1132.80 (0.70) or -$70.00 – $15 commission for a total of -$81.00
Gold futures v/s Spot Gold Swing Trading Costs (5 day position)
Gold Futures Costs Spot Gold Costs
Long position at $1150 @ 1 lot Commission: $15 Long position at $1150 @ 1 lot Spread: 0.3
Take profit at $1200 Profit: $5000 Take profit at $1200 $5000
Overnight Swaps $0.00 Overnight Swaps -0.236 (-$0.24) x 7 = $1.68
Net Profit $4985 ($5000 – $15) Net Profit $4998.32 (5000 – 1.68)

 

In the above swing trading position example you can see that the overnight swaps add up to some costs for a position that you maintain over a 5 (overnight) day period (includes 7 days due to triple rollover on Wednesdays) when trading the spot gold market.

On the other hand, the gold futures position would cost you an outright $15 as long a you are trading within a reasonable period of time before the last trading day of the futures contract.

Besides the above, traders also need to bear in mind that the take profit and stop levels need to be set a minimum of 200 points or $2 away from the market price when trading gold futures.

With spot gold, the limit and stop orders need to be placed 100 points or $1 away from the market price.

 

Stop and Limit order levels for Gold futures and spot Gold
Stop and Limit order levels for Gold futures and spot Gold

 

Both spot gold and gold futures markets have their own pros and cons such as the ability to see volume in the futures markets and the centralized exchange versus the OTC nature in the spot markets. At the end of the day, it all comes down to a trader’s style of trading. The above factors will help you to understand the costs involved based on your trading approach.

 

 

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