Gold Trading Strategy (Backtest And Futures Example)
Last Updated on May 27, 2023
Known for its beauty, luster, and uniqueness, gold is one of the most popular precious metals, and gold futures are the most actively traded contracts on commodity exchanges all over the world. Gold is often used as a store of value because its value is the exact same all over the world. So, regardless of your trading goals, a gold futures strategy can help. What is a gold futures trading strategy?
A gold futures trading strategy refers to the methodologies and techniques you can use to trade gold futures contracts profitably and would include technical and fundamental analyses of the gold futures market. Gold futures are legally binding contracts to deliver or receive the specified quantity of gold on a future date, at a pre-agreed price. The contract trades on the CME Globex platform and ICE Futures US, and it is settled by the physical delivery of the specified quantity and quality of gold. It allows you to take positions on the direction of gold prices, either for speculation, portfolio diversification, or hedging purposes.
In this post, we answer some questions about the gold trading strategy. To show how you can make money trading gold futures, we make a backtest of a potential gold strategy.
What are Gold futures?
Gold futures are futures contracts whose underlying asset is gold bullion. Such contracts represent a legally binding agreement to receive or deliver the specified quantity of gold on a future date, at a pre-agreed price. The contract trades primarily on the CME Globex platform and ICE Futures US. It is settled by the physical delivery of the specified quantity and quality of gold.
Of all metal futures, gold futures are the most actively traded contracts on commodity exchanges all over the world, and the gold market’s value (spot and futures) is in excess of $9 trillion. Gold contracts are standardized in terms of quality, quantity, and date of delivery. But the contract can be traded without getting involved with the delivery process.
If you just want to speculate on the gold price without getting involved in the delivery, you can close out your trades before expiry or roll over your trade to the next contract month. Given the high liquidity in the market, people use it for portfolio diversification, risk hedging, and speculation.
What is a Gold futures strategy?
A gold futures strategy refers to the methodologies and techniques you can use to trade the gold contract profitably. It includes the technical and fundamental analyses for timing the gold futures market, as well as the techniques for position sizing, risk management, and so on.
To succeed in trading the gold futures market, you will need a robust trading strategy that offers precise entry and exit signals. Your strategy may also include spread trading and arbitrage across exchanges.
Gold futures strategy backtest
A backtest with strict trading rules, settings, statistics, and historical performance is coming soon.
What is the seasonality of Gold futures?
Seasonality in gold prices refers to the tendency of gold prices to move in a fairly predictable way during certain periods of the year. The periods here can refer to the months of the year or seasons, such as winter, spring, summer, and fall.
Over the years, gold futures have been noted to perform better during the summer and winter months than during the spring and fall. See the chart below:
What moves the Gold — What affects the Gold the most?
Many factors can affect the price of gold, but the common ones include:
- Interest rate changes: When interest rates are low, gold prices tend to rise, and when interest rates are high, gold prices tend to decline.
- Inflation: Rising inflation leads to higher gold prices, and falling inflation leads to lower gold prices.
- Demand and supply imbalances: When there is more demand than supply, as is the case in recent times, gold prices go up.
- Uncertainty: Any event that causes uncertainty, such as elections, natural disasters, terror attacks, and wars, will push gold prices up.
How are Gold futures traded?
Gold futures contracts are traded on different commodity futures exchanges around the world, such as the HKEX, ICE Futures US, and CME Group’s Globex platform.
On the ICE futures exchange, gold futures (with the trading symbol, ZG) trades from 8:00 PM – 6:00 PM New York Time every trading day, but it opens at 6.00 PM on Sunday. There is a pre-Open market from 5:30 PM on Sunday and 7:30 PM Monday through Thursday. The contract series are as follows: Every calendar month in the 3-month period, beginning with the first listed futures month. Every February, April, August, and October in the 23-month period, beginning with the first listed futures month. Every June and December in the 60-month period, beginning with the first listed futures month.
On CME’s Globex electronic platform, the contract (GC) can be traded Sundays to Fridays, from 6:00 p.m. to 5:00 p.m. New York Time the next day, with a one-hour break at the end of each day. There are monthly contracts listed for 3 consecutive months, any February, April, August, and October in the nearest 23 months and any June and December in the nearest 72 months.
One contract unit is equivalent to 100 troy ounces of gold, and the price quotation is in U.S. dollars and cents per troy ounce. Settlement is by physical delivery, and trading terminates at 1:30 p.m. ET on the third last business day of the contract month.
How do you start trading Gold futures?
To trade the contract, you need a futures broker that will grant you access to the exchanges where gold futures contracts are traded. The first step to start trading is to register with a futures broker, such as TradeStation, and fund your account.
Alternatively, if you just want to speculate on price movements, you may trade the CFD of gold futures contracts via an online CFD broker, such as IG. With CFD, you can trade price fluctuations without having to worry about contract expiry and asset delivery.
What is the Gold trading at?
As of December 2, 2022, both gold futures (GC and ZG) were trading at $1795.90 on the ICE Futures US. See the chart here on TradingView. You can also see the GC chart on CME’s Globex platform.
Note that the price changes from time to time, so what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or from TradingView, click either of those links.
What’s Gold futures hour?
On the ICE futures exchange, gold futures (ZG) trades from 8:00 PM – 6:00 PM New York Time every trading day, but it opens at 6.00 PM on Sunday. There is a pre-Open market from 5:30 PM on Sunday and 7:30 PM Monday through Thursday.
On CME’s Globex electronic platform, the contract (GC) trades Sundays to Fridays, from 6:00 p.m. to 5:00 p.m. New York Time the next day, with a one-hour break at the end of each day.
Where can I find trading charts?
You can get the chart on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts. Another option is to use the Yahoo Finance chart.
You can also use TradingView, which offers free access to charts of different instruments. But to connect to your broker, you have to subscribe to the Pro services. You can also access the chart from the CME platform.
What are the trading symbols for Gold futures?
Gold futures on ICE Futures US has the trading symbol ZG, while gold futures that trade on CME’s Globex platform has the trading symbol GC.
What is the specification for Gold futures contract?
One contract unit of gold futures is equivalent to 100 troy ounces on both CME and ICE exchanges. The price quotation is in US dollars and cents per ounce. The minimum fluctuation is $0.10 per troy ounce = $10.00 per contract.
There are monthly contracts listed for 3 consecutive months, any February, April, August, and October in the nearest 23 months and any June and December in the nearest 72 months. Settlement is by physical delivery, and trading terminates at 1:30 p.m. ET on the third last business day of the contract month.
Why should you start trading Gold futures?
There are many reasons to trade gold futures. These are some of them:
- Gold mining firms can use it to secure good prices for their commodity, while jewelry producers may use it to secure a steady supply of gold
- Wealthy individuals use it as a store of value to hedge against inflation
- Investors use it for portfolio diversification
- Traders use it to speculate on the price fluctuations in gold
What is the contract size?
One contract unit of gold futures is equivalent to 100 troy ounces of gold on both CME and ICE exchanges. Given that the price of a pound of gold as of writing is $1795.90, the total USD worth of a full contract of gold would be 100 x $1795.90 = $179,590.
What is the tick size?
The tick size of one full contract of gold futures is $10.00 per tick per contract.
What is the minimum price fluctuation for Gold futures?
The minimum price fluctuation is $0.10 per troy ounce.
Are there any ETFs?
Yes, there are many ETFs trading on US exchanges that track the performance of the gold market. These are some of them:
- SPDR Gold Shares (GLD)
- iShares Gold Trust (IAU)
- VanEck Merk Gold Trust (OUNZ)
- GraniteShares Gold Shares (BAR)
What factors affect Gold prices?
Some of the factors that affect gold prices include:
- Imbalances in the demand and supply of the commodity
- Political events and natural disasters that spell uncertainty
- Changes in interest rates and monetary policy
- Changes in inflation rates
What is the all-time high for Gold futures?
Based on the TradingView chart for gold futures (GC), the all-time high for the gold market is $2089.20. It reached this level in August 2020.
What are the biggest risks in trading Gold futures?
When trading any type of futures, including gold futures, the biggest risk comes from adverse price movement. Losses can be very huge due to the use of leverage, as they are calculated using the actual value of the contract size traded and deducted from the small margin deposited. For example, if you trade with a 20x leverage, a 1% negative movement would result in a 20% loss in your account, and a 5% adverse price move would wipe out your account completely.
What is the settlement method?
Physical delivery
What is the settlement procedure?
There is the usual daily settlement where Gold futures (GC) are settled by CME Group staff based on trading activity on CME Globex during the settlement period. The settlement period is defined as 13:29:00 to 13:30:00 ET for the Active Month and 13:15:00 to 13:30:00 ET for calendar spreads.
The final settlement on contract expiry is by the physical delivery of the specified quantity and quality of gold, which is supervised by the exchange.
What is the block minimum for Gold futures?
25 contracts on CME and 5 contracts on ICE Futures US.
What is the difference between Gold futures and the CFD instrument for Gold?
Gold futures trade on regulated futures exchanges, while gold CFDs are just contracts between the trader and the online CFD broker to exchange the price difference in gold from the time a trade is opened to the time it is closed. In other words, with gold CFD, the trader is at the mercy of the broker.
However, while gold futures have expiry dates and may involve the delivery of physical gold, gold CFDs can be traded without such worries.
Which forex instrument is the same as Gold futures
Gold futures CFD
What are some important dates for this market?
Some of the important dates in the gold futures market include:
- 1971 when the Bretton Woods system was abandoned
- 1974 when the ban on US ownership of gold bars was lifted and CME launched gold futures
- 2020 when gold futures reached its current all-time high of $2089.20
What is the highest Gold has ever been — its all-time high?
Based on the TradingView chart for gold futures (GC), the highest level gold futures has ever reached was $2089.20. It reached this level in August 2020.
What is the lowest Gold has ever been — its all-time low?
Based on the TradingView chart for gold futures (GC), the lowest level gold futures has ever reached was $100.00, which took place in August 1976.
Conclusion
Trading gold futures offers opportunities to hedge risks, diversify your trading portfolio, hedge inflation, and potentially make money from speculation. However, if you want to trade gold futures like a pro, you need to use the right gold futures strategy!