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The three primary advantages of the CBOT contracts are the transparent electronic trading platform, practical mini-size, and reliable, immediate execution. On other exchanges it can take up to half an hour to get an order filled. And with Tradelink, LLC as the CBOT market maker, continuous two-sided markets are offered at a fair market price. Whether you want to buy or sell, the market maker is there to take the other side.
The CBOT contracts are mini-sized versions of the larger COMEX metals contracts. The CBOT mini-sized 1000-ounce N.Y. Silver futures and CBOT mini-sized 33.2-oz N.Y. Gold offer the size most individual investors are looking for.
These precious metals contracts are traded exclusively on the CBOT's electronic trading platform - one of the most advanced trading platforms in the world.
Why trade gold and silver futures in the current economic environment?
Precious metals are traditionally considered safe markets that can be used as an inflation or currency hedge. Even if investors have money invested in equities or other assets, they still can add gold's or silver's performance to their portfolio through the futures market. By trading gold futures, they get the performance of the asset in their portfolio without committing the full value of the investment.
Another benefit is the ease of trading futures compared to the physical metal which requires you to identify a dealer, take delivery, pay interest, and transfer fees. Although trading futures usually will not result in the delivery of the physical metals, you can take delivery of the physical asset if you choose.
Trading futures provides you with leverage that is not available in the physical market. As a result of trading futures on margin, you can add gold's and silver's performance to your portfolio with a smaller investment.
What market indicators and signals should you look for while following the gold market?
Since gold is a financial instrument, it has traditionally been associated with inflation, currency valuations, asset prices, and interest rates. Other commodity markets such as energy and grains also affect the price of gold. In addition to commodity markets, domestic and global politics have had a major impact on gold.
Gold, as a currency with a stored value and a transactional medium, has a relationship with all other currencies. Individuals will trade currencies for their relative values in gold and as a hedge against inflation. For example, residents of the U.K., France, Australia, Japan, Argentina and Brazil who held gold since January 2000 as a currency hedge have benefited as their currencies have lost value. Also, how the U.S. dollar is affected in the future will have an explosive impact on gold values.
As a stored value, gold is not easy to use for physical transactions. However, with advances in electronics, the world is beginning to use gold as a store of value. In some transactions, gold is the medium and has become as fungible as any currency. As a transactional medium, its value fluctuates with global currencies. As a stored value, it's the one currency that can't be inflated away.
In the early 1980s, gold had a huge inflation premium built into its price, in addition to the cost of production. The store of value during this time was different than the cost. Today, the value and the cost are together - make it more like a currency.
What are the major factors that may currently affect gold?
Gold has the potential to be supportive in the foreseeable future, but there are two macro-economic negatives that may impact gold. First, except for the U.S., many Western central banks have been enormous sellers of their gold reserves. When central banks sell their gold, it is viewed as a price depressant because the markets generally come under distress while absorbing a large supply of gold. Throughout the ages, gold has tended to move towards the most vibrant economies. A second factor affecting the price of gold is war or peace in the world. Depending on what countries or regions are at war, it may impact the supply and demand for gold.
However, news that central banks selling their inventory of gold is as old as gold itself. It is a trading event that causes short-term fluctuations ¾ and fluctuation means a lot of contracts get traded.
What market indicators or signals should an individual investor trading silver watch?
Although gold has some industrial components such as electronics or jewelry, it doesn't compare to silver's industrial uses. The silver market is dominated by its industrial uses.
At the same time, it may be considered the poor man's gold, because of its monetary aspect relative to its usage. Silver is not viewed the same way as gold when it comes to being a store of value.
Silver is a by-product of mining for copper. There is more silver mined than gold. Most industrial silver has been used in the photographic process ¾ but that is changing. Then, why doesn't the value of silver move down to zero, if its primary industrial use is leaching away? One belief is that silver is creeping into technology as small electronic components with uses in automobile starters and fuel pumps. Metals are used as a catalyzing agent in electronics, and silver may be used as a catalyst.
What spreads should you watch involving gold and silver?
There are some very loose spreads for gold. Gold will tend to spread against the most active and volatile markets. If interest rate products are moving, then gold will be priced against them. If crude oil doubles in price, then gold will be tracked against oil. If soybeans move to the $10 range, then gold will be revalued due to inflation. Whatever commodity has the biggest influence on the trading equilibrium will start having a relationship with gold.
Another type of spread that involves both gold and silver is front month versus back months. Calendar spreads are generally considered a pure low-risk spread. If the price of interest rates begin going up, then gold prices will probably rise, creating the potential for a large return on investment trading the calendar spreads.
Are there arbitrage possibilities involving the CBOT mini-sized metals contracts?
Usually, there won't be arbitrage opportunities between the CBOT mini-sized metals and the larger COMEX products. However, people can track the most exciting commodity market of the day and follow its relationship to gold or silver. There's a possible arbitrage between CBOT mini-sized Gold and gold company mine stocks. Those are leveraged gold plays since price changes in gold will impact the mining company stocks. It is not a pure play because there are the costs of production and management.
Where can you go for more information on trading CBOT mini-sized Gold or CBOT mini-sized Silver?
Contact the CBOT Market and Product Development Department at 312-341-7955 or continue to visit www.cbot.com. For more information about Tradelink or for advice on trading CBOT mini-sized metals contracts, visit www.tradelinkllc.com.
