Commodities: Gold

By Noble Drakoln

From the time of the Egyptian Pharaohs to the voyage of Columbus to the New World and beyond, gold has been revered as a symbol of wealth and prosperity. Gold has also been used as currency and as a way to prop up the fiat money of various countries. One of the most significant moves to gold- and silver-backed currency occurred in 1792, which was the year that the U.S. put the dollar on the gold and silver standard.

One-hundred and seventy-nine years later, in 1971, the U.S. was removed from the gold standard by President Richard Nixon. This fundamental economic shift had a tremendous impact on the price of gold around the globe. Approximately eight years later, on January 21, 1980, gold prices catapulted from a low of $35/ounce to a record high of $850/ounce, or $2,398.21 when adjusted for inflation. On March 19, 2008, gold hit a high of $1,022.40. (Find some golden opportunities by investing in gold commodities or futures contracts, in The Midas Touch For Gold Investors.)

Currently, gold is used as an investment, in computers and in jewelry. China, South Africa, the U.S.,Australia, Canada, Indonesia and Russia collectively represent the backbone of global gold production.

Gold Contract Specifications
Ticker Symbol	Open Outcry: GC (NYMEX) Electronic: EGC (Globex)
Contract Size	100 troy ounces
Deliverable Grades	In fulfillment of each contract, the seller must deliver 100 troy ounces (±5%) of refined gold, assaying not less than .995 fineness, cast either in one bar or in three one-kilogram bars, and bearing a serial number and identifying stamp of a refiner approved and listed by the exchange. A list of approved refiners and assayers is available from the exchange upon request.
Contract Months	All months
Trading Hours	Open outcry trading is conducted from 8:20am-1:30pm EST. Electronic trading is conducted via the CME Globex trading platform from 6pm Sundays through 5:15pm Fridays, EST, with a 45-minute break each day between 5:15pm and 6pm.
Last Trading Day	Trading terminates at the close of business on the third to last business day of the maturing delivery month.
Last Delivery Day	The last business day of the contract month. Gold delivered against the futures contract must bear a serial number and identifying stamp of a refiner approved and listed by the exchange. Delivery must be made from a depository licensed by the exchange.
Price Quote	U.S. dollars and cents per troy ounce
Tick Size	NYMEX: 10 cents per troy ounce ($10 per contract)
Daily Price Limit (Not applicable in electronic markets)	No Price Limits

Understanding Gold Contracts

Like every commodity, gold has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.

For instance, if you buy or sell a gold futures contract, you will see a ticker tape handle that looks like this:

GC8Z @ 920

This is just like saying "Gold (GC) 2008 (8) December (Z) at $920/ounce (920)." A trader buys or sells a gold contract according to this type of quotation.

Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the gold contract equals the equivalent of 100 troy ounces multiplied by our hypothetical price of $920, as in:

$920.00 x 100 troy ounces = $92,000

Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a gold contract on the New York Mercantile Exchange (NYMEX) requires a margin of $4,455, which is approximately 5% of the face value.

Calculating a Change in PriceBecause commodity contracts are customized, every price movement has its own distinct value. In a gold contract, a $1 move is equal to $100. When determining NYMEX's gold profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $100. For example, if prices move from $920 to $1,000, you multiply the difference, which is $80, by $100 to yield a contract value change of $8,000. 

-	Buy	Sell	Total Value
Gold Contract Price ($1 move = $100)	$92	$1,000	$80 or $8,000

Gold ExchangesThe futures contract for gold is traded at the New York Mercantile Exchange (NYMEX) through its Commodity Exchange (COMEX) division via open outcry. It is also traded electronically through the Chicago Board of Trade (eCBOT), India's National Commodity and Derivatives Exchange (NCDEX), Dubai Gold and Commodities Exchange (DGCX), Multi Commodity Exchange (MCX) and Tokyo Commodity Exchange (TOCOM).

Facts About ProductionGold mining is a business, and like any business, hard costs are associated with extracting gold from the earth. In 2008, mining gold costs around $238 per ounce. Because the cost is so high per ounce, the belief is that all of the gold ever mined barely totals 145,000 tons, an amount that could form a single cube measuring 66 feet per side.

Historically, South Africa has been the primary gold producer - with much as 80% of the world's supply at one time. In recent years, however, the country's production has significantly dropped from a high of 1,000 metric tons per year to 272 metric tons, a decline in production of more than two-thirds.

A myriad of factors have influenced South Africa's reduction in gold production. For example, mining gold ore has become more difficult, local economic problems have evolved, and more stringent controls have emerged. In 2007, China inched ahead of South Africa, becoming the leading gold producer with a total of 276 tons. (This asset's appeal dates back thousands of years. Find out whether it can live up to the hype in Does It Still Pay To Invest In Gold?)

Factors That Influence Gold's PriceThe price is influenced by the following factors: 

• Gold has developed widespread commercial use as a coating on electrical connectors. It can be found on various devices, from audio and video cables to computer and component cables and connectors.
• Worldwide gold production continues to underperform against worldwide demand. At the current level of production, an assumption is that in less than 45 years, our gold supply will not be able to meet the demand. 
• The World Gold Council estimates that the total gold mined annually is approximately 2,500 metric tonnes. Currently, 3,500 metric tonnes of gold is used in the jewelry, investment and commercial industry, and it is difficult to determine where the 1,000-ton gold shortfall will come from. 
• The International Monetary Fund (IMF) and the Washington Agreement on Gold (WAG) have very strict requirements in gold sales: less than 400 tons per year, and members cannot use gold to back or replace their currency.
• India is the largest worldwide consumer of gold, with an annual consumption estimated at 700 tons a year. Projections have put India's future gold demand at US$20 billion by 2010 and US$30 billion by 2015.

Conclusion

Gold's historical significance and electrical conductivity ensures that it will be in demand for a long time to come. As an investment, gold has cyclically come into and out of favor, and has experienced some of the most extreme pricing of any of the commodity markets. Whether gold will continue to be considered a viable inflationary hedge remains to be seen, but the simple fact that it is a rare and beautiful metal will always keep it in the news.