By Tony Klancic
Gold Futures Trading and the Delivery ProcessGiven the incredible volatility in the markets, there has been an increase in interest from investors interested in not only trading gold futures, but also taking delivery of the physical product. If you are new to futures trading, it’s recommended you work with a professional to help determine if this approach is right for you, and help facilitate the process.
Taking delivery is not a common occurrence in the futures markets, and does involve a number of considerations. The following outlines the procedures and costs for taking delivery gold or silver futures contracts, offered on the COMEX division of the New York Mercantile Exchange. This article is meant to provide a brief overview of the gold delivery process, and it is not all-inclusive of the risks and procedures involved in futures trading.
Entering a Position
Unlike the cash markets, with futures you have to take a long position or "buy" a contract with a specific expiration date, and wait until the contract expires and comes to delivery before you can take possession. What attracts many people to the futures industry is the tremendous leverage involved in trading commodity futures contracts. But, to address the interests of the many who are looking to use the futures markets simply to take delivery of the physical metals, we'll start by first explaining the non-leveraged approach.
If bought today, the price on the December gold contract would be between $695 - $735 per ounce, so the full value of the contract you bought would be $69,500 - $73,500 per 100-troy ounce. If bought today, the price on the December silver contract would be between $9.74 - $9.16 per ounce, or $48,700 - $45,800 per 5,000 troy-ounce contract. Please note these figures do not include any commission charges, and are only an approximation as the market prices have been highly volatile from day to day.
In order to take delivery of the gold or silver with Lind-Waldock as contract expiration nears, you would be required to have the full contract value deposited in your account with Lind-Waldock at the price it was purchased.
Then, on “First Notice Day,” (November 28 for the December futures contract) COMEX will start "assigning" contracts to clients who had bought (established long positions). The last trading day of the December contract is December 29, 2008, but COMEX then would need a few days to process all of the deliveries. You would not actually be able to take physical delivery of the contracts until some time in early January.
Leverage You can enter a position without posting its full contract value, which is where leverage comes in. Upon entering the position through your account with Lind-Waldock, you would post “margin” to control the contract, which is considered a “good faith” deposit of its full value. The current margin for COMEX gold (100-troy oz) is $7,425 per contract, and for COMEX silver (5,000 troy-oz), $8,640 per contract. Margins are subject to change at any time. Note that the current leverage ratio for gold is 10:1. The leverage ratio of these and all other futures contracts can be greater or smaller than this ratio, depending on the initial margin requirement and the full contract value of the instrument being traded.
Prices can change dramatically between the time you buy the contract and expiration, so if gold prices head significantly lower, you may be called to add funds to your account to maintain your position (maintenance margin) or face having it liquidated. A margin call is generated at any time the account liquidation value falls below the Risk Maintenance at settlement, and may be issued at any time (intraday) marked to market.
To avoid this issue, you can simply deposit the full value of the contract when you establish the position, rather than just the required margin. While most futures speculators employ the use of leverage, you don’t have to do so as leverage involves substantial risk of magnified losses. Please speak with a professional if you are planning to only post the initial margin requirement and not full contract value, and are unclear about how leverage works in futures.
Keep in mind that these are tradable contracts, so you don’t have to take physical delivery if you don’t want to. You can close out your metals position at any time before expiration, and take a profit or loss depending on where prices move.
With any futures instrument, investors also have the ability to take a short (sell) position, if a fall in prices in anticipated. If you already own the specified product and are using the futures as a hedge, you can lock in your sales price now, and would be required to deliver it to the buyer at expiration. Or, you can trade out of your position and close out the contract before then without doing so, and take your profit or loss.
Price and Delivery Costs Once the contract is delivered to you, it is in the form of a certificate. Most of our clients will have Lind-Waldock hold the certificate for them so they can sell the contract(s) back into the market at a later date if they wish. Lind-Waldock can send you the certificate as well. In either situation, the costs for taking delivery would include a:
Commission cost per contract, depending upon your level of brokerage service with Lind-Waldock; and One-time delivery fee of $100 per contract (subject to change), and a monthly insurance and storage fee, which varies by facility. If Lind-Waldock holds the certificate, we bill a customer’s account for these charges.
If your intent is to actually receive the physical metal, it is held in storage at specific "delivery points." It is your responsibility to make the arrangements to do this. There are fees associated with removal from the storage facility. In addition, if the metal is taken out of storage, it cannot be sold for delivery on the exchange without being re-assayed.
To take advantage of this investment, an approved and funded account would need to be established with Lind-Waldock before the trade can be executed. Again, trading gold futures without the intention of taking delivery is a viable way to participate in these markets as well. You can potentially benefit from price changes in gold in either direction without the factors associated with the delivery and storage process.
You can register for an individual or joint account online by going to that area of our Web site. You will then scroll down and complete the questionnaire. Don't forget to check the box for "Lind Plus” (broker-assisted trading) if your intent is to work with one of our professional Market Strategists. This will then take you to the login page which will enable you to start the application. Please notify me via e-mail or phone once you’ve completed the application so I can expedite the processing.
If the account is to be established in some other entity such as a corporation, LLC, partnership or trust, the forms can be e-mailed to you.
Tony Klancic is Senior Account Executive, Lind-Waldock, Chicago
