Precious Metals Acquisition

Futures Contracts vs. Spot Trading

by Paul Skarp, AaronTrade.com | December 23, 2008

I have seen a significant amount of information published over the past few months about taking delivery of gold and silver futures contracts on various related websites. However, I haven’t come across much information, if any at all, about taking delivery of precious metals via spot gold and silver trading. Through this commentary I will provide a basic explanation on another method of acquiring precious metals in large quantity.

Gold / Silver Futures Contracts:
To take delivery of a gold and/or silver futures contact 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. However, for example purposes we will use the COMEX.
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, First Notice Day.

Gold / Silver 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 by default.

1. Bucket Shops
These are the type of firms that more resemble arcade games than anything else. The common terminology used is dealing desk. One item of note is not to confuse the terms dealing desk and market maker. Many times these terms are used interchangeable but technically they are two separate things. A dealing desk is what should be avoided. Under a dealing desk operation the firm in question takes the opposite side of your trade. After taking the opposite side of your trade they can create whatever price suits their fancy at that moment. On top of that they can even create different prices for “select” clients. However, they don’t usually make it that obvious. My best advice is to avoid dealing desks at all costs.

2. “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”.

3. Professional / Institutional
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 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 three 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.
For illustration purposes I have provided a screenshot the EBS platform.

EBS Spot Gold & Silver

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 deliver is usually further out in advance. In spot precious metals settlement is typically done in two days.
Delivery specifications are another important difference. For example, on EBS the specifications are based on the following Loco London http://www.lbma.org.uk/ definitions:

Unit of delivery of Loco London gold
This is the London Good Delivery gold bar. It must have a minimum fineness of 995.0 and
a gold content of between 350 and 430 fine ounces with the bar weight expressed in multiples of 0.025 of an ounce the smallest weight used in the market. Bars are generally close to 400 ounces or 12.5 kilograms.

Unit of delivery of Loco London silver
This is the London Good Delivery silver bar. It must have a minimum fineness of 999 and
a recommended weight between 750 and 1,100 ounces, although bars between 500 and
1,250 ounces will be accepted. Bars generally weigh around 1,000 ounces.
In conclusion, there is no right or wrong answer when comparing the differences between futures contacts and spot precious metals trading. While the acquisition of precious metals via futures contracts may work better for one person the exact opposite could hold true for somebody else whereby spot may provide the better option. While this short overview is by no means all inclusive hopefully it will provide a basic understand of another available option for the procurement of precious metals in large quantity.

Disclaimer: Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of entry and liquidation may impact trading results. There is a substantial risk of loss in trading futures and options.

Contact Information

Paul Skarp | Principal, AaronTrade.com | (866) 455-3633 | Email | Website