Gold Futures

If you're new to gold trading, it may help you to understand a few basic concepts. Let's start with futures. A future is a contract to buy or sell a commodity or asset for a specified price on a specific future date. If that sounds strange, knowing how the process evolved may help you to understand how futures trading is a hedge against market fluctuations.

Ok, we start with a grocer who sells beef. The grocer has suppliers who regularly sell to him at a fairly constant price per pound. As long as the farmer continues to sell the beef at the same price, the grocer has a good idea of what his profit on the sale of the beef will be. However, the grocer may worry about the possibility that the farmer might increase the price of the beef and about what an increase would do to his profits.

On the Farmer's Side

The farmer may be concerned that he will not be able to supply the grocer with all the beef the grocer needs. Disease, floods, or other catastrophes could affect the amount of beef the farmer could produce. If the farmer had less beef to sell, the only way he could survive would be by charging more for what he could sell.

Knowing that there are always risks on both sides of any exchange, the farmer and the grocer sometimes got together and agreed on a specific price for the beef no matter what happened to the supply. In essence, they were agreeing to futures, agreeing that they would trade beef at a constant rate at a specified time. This process eventually grew into the concept of regulated, pre-defined futures trading. Trading gold futures on the gold market is exactly the same as trading beef or any other commodity.