Autumn Gold Rankings.
past performance is not necessarily indicative of future results. this matter is intended as a solicitation for managed futures. the risk of trading commodity futures, options and/or foreign exchange ("forex") is . GOLD - COMMODITY EXCHANGE INC. CFTC Commitment of Traders *Combined Futures and Options* December 28, Reportable Positions as of 12/18/
Physical bullion such as bars or coins is the most direct way to invest in precious metals. Investing in bullion requires a secure storage facility. Some precious metals such as silver have such a low value-to-weight ratio that storing them might be too expensive and impractical.
Futures are a derivative product that allows traders to gain exposure to commodity prices without physically taking possession of the asset. With these contracts, traders agree to purchase a certain amount of a commodity at a date in the future the expiration date. The trader pays for the contract at the time of purchase. If prices rise between the purchase date and the expiration date, the trader will profit, whereas if prices fall, the trader will lose money. Most futures markets offer generous leverage to traders.
As a result, traders only have to put up a small fraction of the value of the contract when buying. This can produce great returns if the price of the commodity moves higher. However, if the price moves lower, the trader must put up additional margin to cover the risk of the investment. Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricin g.
Options on futures are another derivative instrument that employs leverage to invest in commodities. There are two types of options: An owner of an option contract has the right but not the obligation to buy in the case of a call option or sell in the case of a put option a particular futures contract at a specific price the strike price on or before a certain date the expiration date.
In other words, an option buyer can exercise a right to take a position in the futures market at or before expiration. If the option is a call, the trader can exercise the right to go long the futures contract. If the option is a put, the trader can exercise the right to go short the futures contract.
An options purchase will be profitable only if the price of the future exceeds the strike price in the case of a call by an amount greater than the premium paid for the contract. For a put purchase to be profitable, the price of the future must fall below the strike price by an amount greater than the premium paid for the put.
Therefore, options buyers must be right about the size as well as the timing of the move in futures to profit from their trades. ETFs are financial instruments that trade as shares on exchanges in the same way that stocks do. Some ETFs invest in commodity futures or options on futures, while other ETFs invest in shares of companies that produce the particular commodity.
Still, others invest in physical commodities such as bullion. While ETFs may seem like perfect proxies for investing in commodities, traders should be aware of their risks and costs. ETFs that invest in physical commodities , futures or options on futures come with the same risks and rewards that individual investments in these products do see above.
For example, an ETF that invests in bullion would incur the same storage and security costs that individual traders do. Ultimately, these costs get passed on to the ETF trader.
As for ETFs that invest in shares of companies that produce commodities , they come with the same risks and rewards of investing in individual shares see below. Commodity shares can be an effective way to make a leveraged bet on commodity prices. Commodity producers often have large initial capital costs to develop, explore and produce resources. Later in their development, they have mostly fixed costs such as salaries, rent and debt servicing.
However, commodity producers always have variable revenues that depend on the price of the commodity they are selling. In theory, then, investing in commodity companies is a way to make a leveraged bet on the price of the particular commodity. However, many factors other than commodity prices can affect the performance of commodity company share prices:. Contracts for Difference CFDs are another derivative instrument that can be used to invest in commodities markets.
A CFD is basically a contract between a trader and a brokerage firm. At the end of the contract, the two parties exchange the difference between the price of the asset at the time they entered into the contract and its price at the end of the contract. Customers deposit funds with the broker, which serve as margin.
One key advantage of CFDs is that trader can have exposure to commodity prices without having to purchase shares, ETFs, futures or options. CFD brokers offer generous leverage to traders on many instruments. As with futures and options, leverage works both ways.
It can enhance returns or force traders to post additional margin periodically to maintain positions. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. As with stock and bonds, speculators in commodities markets look to buy an asset at a low price and sell it at a higher price. However, commodity trading is different from stock and bond trading in three important ways: Given these challenges, one might conclude that commodity trading is no different than betting on a roulette wheel at a casino!
However, with the right approach, commodities investments can be a profitable addition to an investment portfolio. Researching trends and developing an understanding of the factors that move commodity markets takes considerable time and thorough research skills. Unlike stocks and bonds, the information needed to make investment decisions is often scattered in many places.
Many traders are attracted to commodity markets because of the extensive leverage they offer. Traders should examine long-term charts to assess the historical price ranges of individual commodities. They should then use these charts as a guide to calculate worst-case scenarios. Ultimately, they should enter positions in sizes small enough to enable them to make margin calls if positions move against them. Unfortunately, many novice traders hold on to losing positions and hope that the positions will return to profitability.
This focus on increasing profits as opposed to limiting losses is a major mistake that traders at all levels must learn to avoid. One way to avoid this problem is to place disciplined stops on commodity trades. A stop is a level below which a trader exits a long position. Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity.
It also adds overall diversification to a stock and bond portfolio. Most strategies fall generally into one of two categories:. This strategy makes trades based on the underlying economic factors that determine the value of an asset.
Traders that use fundamental analysis need to develop a keen understanding of the factors that influence the supply and demand picture for a particular commodity. Supply and demand are opposing forces.
Rising demand positively impacts prices, while rising supply negatively impacts prices. This strategy uses historical prices and charts to analyze trends. Technical analysis traders believe historical price trends have predictive ability for prices in the future.
They look for price points in the past where significant buying or selling occurred. They then place orders to trigger positions once those price levels occur again. Pure technical analysis traders pay no attention to fundamental economic factors in their trading. Traders with limited or no previous experience with commodity markets should stick to the most basic strategies for assessing markets.
In the case of fundamental analysis, this means paying attention to these items:. Beginning traders should look for broad trends in the output of individual commodities. Patterns in the level of crops being produced, metals being mined and oil being drilled can offer clues about the direction of markets.
Traders with some experience can begin to incorporate more complex data into their trading strategies. Intermediate-level fundamental traders may want to delve deeper into the end markets for particular commodities.
For example, strength or weakness in the commercial real estate markets in large metropolitan areas can offer clues about demand for steel and other industrial metals. Similarly, the Cattle on Feed Report released by the USDA shows the future supply of cattle coming on to the market and can offer clues about future beef prices.
Once traders become familiar with interpreting the significance of these data points, they can use them to make trading decisions. Intermediate-level technical analysis traders can begin to incorporate more sophisticated charting tools into their trading decisions:. Another strategy intermediate-level technical traders might employ is to compare charts of different assets.
For example, oil and stocks enjoy a very high historical price correlation. If one of these markets is making a series of higher highs, then traders might expect the other market to follow suit. Experienced traders employ the most sophisticated trading strategies. For fundamental traders, these include the following:. Although many traders consider themselves either fundamental or technical traders, this distinction need not hold in every case.
The very best traders incorporate elements of both forms of analysis in their trading. For example, a trader may see production figures for gold dwindling. At the same time, the trader notices that the CCI indicates that gold is oversold. The confluence of these two indicators may be a perfect signal to buy gold. Why, after participating in every gold and silver "delivery" month for years, has the JPM House account suddenly ceased all activity? Again, are they "full"?
Has the CFTC slapped a penalty upon them for repeatedly exceeding delivery month position limits? Most importantly, what if anything might this mean for price? Has JPM conspired to keep prices low for years so that they could acquire metal as inexpensively as possible? And, now that they appear to be "done", might price finally be allowed to rise? Unfortunately, all we can do is speculate. The actual answers will very likely never be known as the only thing that remains constant in the world of the paper derivative pricing scheme is the deliberate opacity of the process.
Reproduction, in whole or in part, is authorized as long as it includes a link back to the original source. Our editing team, cumulating many years of experience, wishes to bring to the investors as much information as possible to help them in taking decisions independently and objectively when investing in the precious metals sector. We also regularly publish interviews with fund managers and independent specialists and analysts to let our readers and our investing clients further their analyses of the precious metals markets.
We also provide translations of several articles for that purpose. Secure storage outside the banking system Learn more. All for Nothing Philippe Herlin. After the first 60 days or so, JPM had only brought in , ounces, all of it marked "eligible".
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For the serious trader, a knowledge in how to trade commodities is vital:
Other factors that can affect supply include political , environmental or labor issues in major producing countries. Many traders trade crack spreads , which are the differences between crude oil prices and the price of refined crude products such as gasoline.