What Is a Gold Continuous Contract

Let`s start with a futures market – soybean oil, or soybean oil for short – and say there is no continuous set of soybean oil futures prices. Futures markets consist of individual contracts, each with a predetermined duration. At all times, the market consists of a series of contracts or “delivery months” whose expiry dates extend into the future. When one contract expires, another is listed for negotiation, and so the cycle continues. The only way to look at a long-term continuous history of soybean oil prices is to access a spot market price record. Gold trades in dollars and cents per ounce. For example, if gold is trading at $600 per ounce, the contract is worth $60,000 ($600 x 100 ounces). A trader who is long at $600 and sells at $610 earns $1,000 ($610 – $600 = $10 profit; $10 x 100 ounces = $1,000). Conversely, a trader who is long at $600 and sells at $590 loses $1,000. Hedgers use these contracts to manage price risk in an expected buy or sale of the physical metal.

Futures also offer speculators the opportunity to participate in the markets without physical support. Gold and silver futures can offer investors looking for opportunities outside of traditional stocks and fixed income a hedge against inflation, speculative gambling, an alternative asset class or a trade hedge. Financial leverage is the ability to trade and manage a product of high market value at a fraction of its total value. Futures trading is done with a performance margin that requires much less capital than the physical market. Leverage offers speculators a higher risk and a more profitable investment profile. The same lack of interest can be demonstrated by a speculator. He may have his own reasons for trading December soybean oil “early” in the cycle. For example, he may be discouraged by the need to “roll” all intermediate contracts, creating commission costs and a possible “slippage” each time. If the volume of transactions is enough to achieve this, why not just jump into December? It is often assumed that in the case of a long-term contract, the “spot month” must be displayed at all times to be “correct”.

This is not the case. A continuous contract is a representation, and that representation is accurate only to the extent that it is useful. There is no single “right” way to calculate a continuous contract for a futures market. The representation of the “spot month” is probably the most popular, but not necessarily the most useful. When entering into a reinsurance contract, the parties concerned may decide that they want a continuous contract that extends the policy indefinitely. The wording of the contract defines the risks covered and also specifies the procedures that each party can follow to submit a termination. The notice may be written notice given one month before the renewal of the contract, or it may follow the notice period agreed upon by both parties. For example, the validity part of the insurance contract may indicate that the contract is considered continuous, unless both parties indicate that it should not be considered as such. The assumption that all delivery months are homogeneous, which is implicit in the open volume/interest algorithm, is wrong, at least for most types of futures markets. This is easy to demonstrate when different roll plans are used to create continuous contracts for the same market.

The variation in results is often clearly visible to the naked eye. Hedgers occupy a position in the market that is the opposite of their physical position. Because of the price correlation between futures and the spot market, a profit in one market can offset losses in the other. For example, a jeweler who fears paying higher prices for gold or silver would then buy a contract to get a guaranteed price. If the market price of gold or silver goes up, they have to pay higher prices for gold/silver. However, since the jeweler took a long position in the futures markets, he could have made money on the futures contract, which would offset the increase in the cost of buying gold/silver. If the spot price of gold or silver and futures prices were to fall, the hedger would lose on his futures positions but pay less if he bought his gold or silver on the spot market. Another simple algorithm for building continuous contracts is to follow the example of the market. If the volume and/or open interest increases in the course of a month back, the series leaves the current contract and moves on to the previous month. At first glance, this is a smart algorithm because it automatically bypasses liquidity issues.

It can also overcome the problem of the day of notice by assuming that the trading volume always leaves the current contract on time. This raises an obvious question: if the contract with the highest volume is the “right one”, why is there so much interest in others? The answer is that different delivery months offer different trading opportunities, both for hedgers and speculators. The eurodollar futures market tries to predict the level of interest rates on Eurodollar deposits at certain times in the future. The closer the time gets to the “now”, the more sensitive the market is to what happens to spot rates. For this reason, prices may change in different ways during different months of delivery. For example, prices can move quite strongly during the spot month, while the last few months remain relatively quiet and vice versa (see charts below). It is even possible for prices to rise one month and fall another, although this type of divergence is more common in commodity futures markets, where seasonal factors play a more important role. As with gold, the delivery requirements for both exchanges specify safes in the New York area. The most active months for delivery (depending on volume and open interest) are March, May, July, September and December. Money also has position limits set by stock exchanges.

Two different positions can be taken: a long position (long position) is an obligation to accept delivery of the physical metal, while a short position (sell position) is the obligation to deliver. The vast majority of futures contracts are settled before the delivery date. This is the case, for example, if an investor with a long position initiates a short position in the same contract and effectively eliminates the initial long position. A continuing contract is a reinsurance contract that does not have a fixed end date and continues to be renewed and is in effect until terminated by one of the parties. Continuous contracts differ from standard reinsurance contracts in that they do not only cover a fixed period. Some traders in the system are happy that their continuous data is “transmitted” to them by an algorithm like Rolling on Volume / Open Interest. Others prefer to build their own data and experiment with the results. Rolling on volume and/or open interest is a great way to build continuous contracts, as long as the question of which month of delivery appears at some point in the series is not considered an issue.

Although an uninterrupted contract can be renewed indefinitely, it will only remain in effect at any time for a specific contractual period. This means that both parties have the option to terminate the contract without breaking the terms of the agreement by terminating the contract while it is still active. This type of contract is a fixed-term contract, with a provision allowing for regular renewal. The size of the tick is $0.001 per ounce, which is $5 per large contract and $1 for the mini-contract. The market may not be traded in smaller parts, but it can trade larger multipliers such as pennies. Silver also has two contracts negotiated on eCBOT and one on comex. The “big” contract is for 5,000 ounces traded on both exchanges, while eCBOT has a mini for 1,000 ounces. Part 2 of the article addresses a problem with simple “spliced” contracts and introduces “upstream adjusted” contracts. Click Part 2 to continue.

The termination must take place within the period specified in the termination clause, otherwise the contract will continue for a later period. Reinsurers and reinsurers are often in a dilemma as to whether to terminate or continue the contract. In such cases, a practice has developed where one or both parties send a notice of termination (often referred to as a “PNOC”). The preliminary notice gives the parties an opportunity to evaluate the relationship, receive the updated annual information for the contract, and then decide whether to continue with the contract. If the decision is made to continue, the PNOC will be revoked and the contract will run continuously beyond the anniversary date. There are a few different gold contracts traded on US exchanges: one on the COMEX and two on the eCBOT. There is a 100 Troy ounce contract traded on both exchanges and a mini contract (33.2 troy ounces) traded only on eCBOT. Of course, it is always possible to “splice” individual soybean oil futures contracts in one way or another to represent their history. .