Some people do not understand the difference between Spot Metals vs. Metals Futures. There are actually two different ways of acquiring these precious metals.
Futures Metals: To take delivery of a precious metals futures contract, the process first begins by opening an account with a commodity futures broker. That firm must be able to execute transactions on the COMEX, Chicago Board of Trade or any other exchange that has gold and/or silver listed for trading which is not a cash settled contract.
Once an account is opened and capital is deposited for trading an order to buy a specific amount of contracts in a given trading month must be placed. After an order is placed and filled, the delivery processes can’t begin until, at the very least, the First Notice Day.
Spot/ Precious Metals: The trading of spot precious metals is typically transacted on spot foreign exchange platforms. After all gold is the ultimate currency so that should not really be surprising to anyone. Therefore, by understanding the basic structure of spot foreign exchange you will comprehend the basics of spot precious trading.
You can go to a “middle tier” ECN. Under this situation the trading environment is on a more level playing field. Traditionally, under this setup trading will be conducted with other liquidity providers such as banks and other private traders. The crucial point is that you don’t have the firm taking the opposite side of your trade and then fixing prices against your position. Under this category a firm will typically have a markup on the liquidity stream but they are not fixing prices to whatever level they “feel” is “required”.
Or, You can go to an institutional buyer. This category is designed for larger volume entities. Some of the solutions typically witnessed under this area are EBS, Hotspot Institutional, FXall Accelor and “House” Currenex. EBS Prime, Hotspot Institutional and other similar entities are setup as traditional ECNs. Currenex on the other hand can potentially see substantial changes in liquidity from firm to firm due to the fact that individual liquidity providers can be added on top of the Currenex ECN. At present, the two solutions under this category offering trading of spot precious metals are EBS, Hotspot Institutional and Currenex. Precious metals can be traded in numerous currency denominations. Not all providers may offer spot precious metals trading though. Additionally, minimums and other specifications can vary from provider to provider.
There are many differences as well as similarities between spot precious metals trading and futures contracts. One primary difference is the delivery time frame. Utilizing futures contracts the process of taking delivery is usually further out in advance. In spot precious metals settlement is typically done in two days.
There is also something called London “fixing”. London fixing is the procedure by which the price of gold is set on the London market by the five members of the London Gold Pool. It is designed to fix a price for settling contracts between members of the London bullion market, but informally the Gold Fixing provides a recognized rate that is used as a benchmark for pricing the majority of gold products and derivatives throughout the world’s markets.
The Fixing historically took place twice daily at the City offices of N M Rothschild & Sons in St Swithin’s Lane, but since 5 May 2004 it takes place by telephone. In April 2004 N M Rothschild & Sons announced that it planned to withdraw from gold trading and from the London Gold Fixing. Barclays Bank took its place from 7 June 2004, and the chairmanship of the meeting, formerly held permanently by Rothschilds, now rotates annually.
A tradition of the London Gold Fixing was that participants could raise a small Union Flag on their desk to pause proceedings. Under the telephone fixing system, participants can register a pause by saying the word “flag”, and the chair ends the meeting with the phrase “There are no flags, and we’re fixed”.
Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
