Introduction
For a very long time, people have valued gold and silver as priceless possessions, status symbols, and refuges during uncertain economic times. The trade of these metals has changed dramatically in the current financial environment, with futures contracts on large platforms like the Commodity Exchange (COMEX) playing a crucial role. This blog explores the historical relevance, trading mechanisms, and strategic opportunities of COMEX gold and silver futures, delving into the complexities of the game.
Gaining a grasp of the workings of COMEX’s gold and silver trading dynamics will help you, regardless of expertise level, take advantage of a plethora of financial opportunities. Liquidity concerns during Asian trading hours and cross-exchange arbitrage between Tokyo Commodity Exchange (TOCOM), Shanghai Futures Exchange (SHFE), and COMEX are just a few examples.
Trading in Gold and Silver Has a Long History
In the present global gold market, London, New York, and Shanghai are the three main gold trading centers. As the center of “OTC Loco London”1 commerce, London has the longest history. Gold futures are physically delivered in New York and are traded 24 hours a day, 7 days a week on COMEX, a New York-based exchange. In the past, actual gold in the form of jewelry and bullion bars has been favored by Asian investors. Nonetheless, trading paper gold became increasingly popular as a result of China’s economic growth at the turn of the century. The largest volumes of spot and futures gold trading among Asian exchanges are recorded by the Shanghai Gold Exchange (SGE) and Shanghai Futures Exchange (SHFE), respectively. The trio of regional commerce
Asian Hours See Extreme Liquidity in COMEX Gold
It is commonly known that COMEX trades more gold futures (code: GC) than any other exchange in the world, with about 381,000 contracts2 (or 1,185,000 kilos) traded daily. The gold market is open for business almost around the clock, and CME Group provides access to it so that anyone, wherever in the world—in Asia, Europe, Latin America, or the United States—can trade at a time that best suits their schedule. GC is a global product that offers excellent liquidity all day long. Over 390,000 kg of GC are exchanged every day during Asia trading hours, which we have defined as 8 a.m. to 8 p.m. Singapore time.
It shows that COMEX gold volumes during Asian hours exclusively surpass the sum of the volumes of each of the individual Asian peers. In comparison to 1.6 million kg at SHFE4, 2.2 million kg at SGE, and 0.6 million kg at TOCOM, the average monthly volume of gold futures at COMEX (during Asia hours, from January 2017 to April 2018) was around 6.4 million kg. We have seen a considerable increase in our Asian hour liquidity; for example, Asia hours now make up over 33% of total GC, up from 15% in 2012.
Trading Gold Futures Cross-Exchange
In recent years, a number of new exchange-listed gold products have entered the Asian market. For instance, in July 2017, Hong Kong Exchange attempted once more to introduce gold futures, and DGCX just introduced a contract that was based on SGE’s gold benchmark. Thus far, the gold futures contracts on SHFE in China and TOCOM in Japan have drawn respectable volumes.
When trading across markets, correlation is a crucial tool for traders. Due to the strong correlation between gold prices on regional exchanges, many traders have been drawn to this phenomenon in an attempt to arbitrage gold trades between exchanges. Arbitrage trading between gold futures listed on COMEX, SHFE, and TOCOM has become increasingly popular due to the strong liquidity of COMEX gold futures during Asia hours.
Comparing the Gold Futures on COMEX, SHFE, and TOCOM
Because GC contracts are 100 troy ounces, or approximately 3.11 kilograms, traders that arbitrage GC futures against 1 kg contracts of gold, such as SHFE or TOCOM, would trade three SHFE/TOCOM contracts for each GC contract. It enumerates the pertinent characteristics of the contracts.
The 50 troy ounce E-mini Gold, 10 troy ounce E-micro Gold, and 1 kilogram Gold Kilo futures contracts are available on COMEX in addition to the normal size GC contract. Despite having contract sizes more akin to those of SHFE and TOCOM, these are typically traded by institutions with certain needs. For price discovery, institutional and retail investors most often choose the flagship 100 troy ounce GC contract.
The market’s top option is GC, but other smaller contracts are also expanding.
The 50 troy ounce E-mini Gold, 10 troy ounce E-micro Gold, and 1 kilogram Gold Kilo futures contracts are available on COMEX in addition to the normal size GC contract. Despite having contract sizes more akin to those of SHFE and TOCOM, these are typically traded by institutions with certain needs. For price discovery, institutional and retail investors most often choose the flagship 100 troy ounce GC contract.
Good Correlation Is Found Among COMEX, SHFE, and TOCOM Gold Futures
Because gold is the same precious metal everywhere and has historically maintained a strong correlation between prices across national borders, it is a popular choice for arbitrage. Figure 5 compares the price movements of COMEX, SHFE, and TOCOM gold futures over the last 16 months while taking foreign exchange translations into consideration. For the majority of that time, their front or spot month contracts—which serve as proxies for spot gold prices in the corresponding regions—have shown price level correlations greater than 0.8.
Short-term price divergences have been caused by local geopolitical events or supply-side imbalances, as evidenced by the recent months’ COMEX and SHFE gold prices.7. This is probably going to draw in investors, especially for spread trading positions.
Exchange of the Current Contract Months
The benefits of trading arbitrage between COMEX, SHFE, and TOCOM as well as the investment case for COMEX gold futures have been discussed thus far. To get the most out of his trading expertise, a trader must be aware of a few nuances. The first is being aware of the contract months that should be traded at various times. Because these contracts feature the tightest bid-offer spreads and the deepest order book, retail investors would trade the most liquid contracts.
The three gold contracts seem to have different features from one another. The April contract, for instance, is the most liquid contract in January and February. COMEX’s gold volumes appear to be concentrated around the second forward month contract.
The trading volumes of SHFE appear to be focused in two contract months: the December contract, which is traded from May to October, and the June contract, which is traded from November to April. Volumes for TOCOM are centered on the contract month that is the furthest away.
In pairs the most liquid months on each exchange and compares the corresponding price correlations between them. Up until October 2017, there was a steady price correlation above 0.90 between COMEX GC and the liquid gold contracts at SHFE and TOCOM. Despite the periodic breakdown of relationships. Although the seasonal disintegration in connections
Possibility of Arbitrage in Upcoming Months
The spot month prices of COMEX and SHFE/TOCOM normally differ by about $30/oz, and this is usually justified by the logistics and transportation expenses involved in getting the metal into the Far East. For investors who are aware of them, the irregular widening of spreads may present short-term arbitrage possibilities.
It demonstrates that SHFE’s gold forward curve is contango in shape, similar to COMEX’s forward curve, but it does reveal certain bends along the curve, maybe as a result of regional variables. Additionally, the contract months of June and December are often when the liquid contracts are concentrated.
The peculiar thing about TOCOM’s forward curve is that it frequently leans slightly backward! This could be due to the fact that open interests and volumes tend to converge on the contract month that is farthest listed, which is 10 to 11 months ahead. The spot month price therefore tends to converge toward the SHFE spot month price, while the forward price tends to converge toward the COMEX forward price.
Additional Strategies for Trading Gold
Institutions frequently participate in other, more complex trades in the precious metals market in an effort to beat the market. A few of them are listed here for informational purposes just because they are not as well-liked by ordinary investors.
- Trading COMEX gold futures versus gold exchange-traded funds (ETFs). Although gold ETFs, like the SPDR Gold, are also well-liked investments, an ETF and a futures contract are not the same thing. An exchange-traded fund (ETF) often tracks the spot price of gold and is invested using a buy-and-hold strategy in addition to various tax treatment and fees. On the other hand, gold futures are utilized as a hedging strategy with an eye toward the future price of gold. Retail investors may choose to arbitrage a gold ETF against gold futures for certain reasons, however
- Silver-Gold Arbitrage. A close eye is kept on the Gold-Silver ratio by traders who arbitrage the two precious metals. The ratio shows how many silver ounces are needed to purchase one gold ounce. The ratio is 81, for example, if gold is trading at $1,300 an ounce and silver at $16. This trading approach is fascinating and is covered in more detail in a different publication.
- Against COMEX gold futures, Loco London Spot. The Loco London T+2 Spot Gold/Silver versus COMEX arbitrage, also referred to as an Exchange for Physical, provides a transparent, liquid, and economical way to hedge OTC positions, whether long or short. The T+2 OTC leg will normally be rolled on a tomorrow/next (T/N) basis, avoiding the need for finance if the leg is long or for delivery if it is short. This behavior
Futures for COMEX and SHFE Silver
When it comes to trading futures, ETFs, or spots, silver is frequently eclipsed by gold. However, it should be noted that COMEX Silver futures are the second most traded precious metal by contract volume on CME Group, with an average daily trading volume (ADV) of over 102,000 contracts, as opposed to 381,000 contracts for COMEX Gold futures. One of the most popular commodities spread trades on CME Group is the COMEX Gold vs. COMEX Silver spread futures.
The value of a COMEX Silver contract is approximately $85,000, or almost two-thirds that of a COMEX Gold contract, despite the fact that the unit price of silver (roughly $17 per ounce in Q1 2018) is significantly lower than that of gold (roughly $1,300 per ounce in Q1). Additionally, silver futures are sold in smaller
Since silver is a more common industrial commodity than gold, it is more susceptible to changes in the overall state of the economy when it comes to price. However, it functions similarly to money and is affected by psychological factors and flights of safety, much like gold.
Although both metals’ values are often erratic during significant economic announcements, including FOMC meetings and interest rate decisions, silver has historically seen greater volatility than gold, which is one of the reasons why precious metals traders prefer it. Retail investors frequently hold tiny stakes to ride the wave, while banks and other financial institutions trade gold and silver futures as hedges against political or economic crises.
Conclusion
The main distinction between institutional and retail investors is the size of their trades. They also have a different investment horizon than proprietary traders, usually ranging from one day to a month rather than minutes. Retail investors typically follow trends, entering the market after they see that a widespread trend has begun.
Retail investors should choose liquid futures contracts (where bid-offer spreads are tighter) in order to reduce price slippage because retail brokers and futures commission merchants (FCM) impose commissions and fees. Because of the leverage provided and the margin offsets available when spreading two futures contracts on the same exchange, futures are also more cost-effective than cash-and-carry trades or over-the-counter investments.
FAQ’S
1. What are COMEX Gold and Silver futures?
COMEX Gold and Silver futures are standardized contracts where participants agree to buy or sell a specific amount of gold or silver at a set price on a future date. These are used for hedging or speculating on future price movements.
2. Why are gold and silver valuable investments?
Gold and silver are valued for their rarity and durability. They serve as a hedge against economic instability and inflation, maintaining their value during economic downturns.
3. How does trading on COMEX work?
Trading involves buying or selling futures contracts that specify the amount and delivery date of gold or silver. COMEX provides a liquid, transparent market for these trades, allowing participants to hedge risks or speculate on prices.
4. What are the trading hours for COMEX futures?
COMEX futures trade nearly 24 hours a day, with short breaks. This schedule accommodates traders from various time zones, including Asia, Europe, and the Americas.
5. What is cross-exchange arbitrage?
Cross-exchange arbitrage exploits price differences between gold futures on different exchanges like COMEX, SHFE, and TOCOM. Traders profit from price differences by buying low on one exchange and selling high on another.