Gold
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What Is a Futures Contract? How Paper Markets Set the Price of Physical Gold
WHAT IT MEANS
A futures contract is a binding agreement to buy or sell a fixed quantity of metal, at a price agreed today, for delivery on a specified date in the future. A COMEX gold contract covers 100 troy ounces. A silver contract covers 5,000.
The contract is standardised — quantity, purity, delivery month and approved vault are all fixed by the exchange — so the only thing two parties negotiate is price. That standardisation is what makes futures liquid enough to trade in seconds, and it is why the futures market, not the physical market, is where the headline price of gold is discovered.
WHY IT MATTERS FOR INVESTORS
Most people who buy a coin have never traded a futures contract and never will. It still sets what they pay.
The spot price quoted on this site, on every dealer's site and in every headline is derived from the most actively traded futures month. When you buy a one-ounce coin, the premium is added to a number that was set by institutions trading 100-ounce contracts they mostly never intend to take delivery of.
That gap between paper and physical is the thing worth understanding. Futures volume dwarfs the amount of metal that actually exists in exchange vaults. In normal conditions that does not matter — contracts are closed out for cash and the two markets track each other closely. In stressed conditions it can matter a great deal, and the signal shows up as a divergence between the futures price and what a dealer will actually sell you metal for.
HOW IT CONNECTS TO PRECIOUS METALS
Three practical consequences follow for a physical buyer.
The first is that premiums widen when paper and physical disagree. If futures fall but physical demand surges, dealers cannot restock at the futures price. The spot number on the screen drops, the premium over it rises, and the coin costs roughly what it did yesterday. Buyers who watch only spot conclude the dealer is gouging. What they are seeing is the physical market refusing to follow the paper market down.
The second is that delivery months shape the calendar. Contracts expire on a schedule, and the days around an expiry — particularly first notice day, when holders must declare whether they intend to take metal — can produce volatility that has nothing to do with gold's long-run case.
The third is that futures let large holders hedge. A dealer carrying inventory is exposed to a price fall between buying metal and selling it. Selling futures against that inventory removes the exposure. This is ordinary risk management, and it is part of why a well-run dealer can quote a tight spread.
THE BOTTOM LINE
A futures contract is a promise about metal, not metal. It is the mechanism that discovers the price, and it works well enough that spot and physical usually move together. Knowing it exists explains the two things that most confuse new buyers: why the premium moves independently of spot, and why the price can lurch on a day when nothing happened in the physical world at all.
If you are buying coins or bars to hold, you are not trading futures. You are buying at a price that futures set.
WHERE THIS APPLIES
Watch the number futures set on our live spot prices page, or see what the premium over it actually is on gold and silver we stock.
RELATED TERMS
COMEX | Contango | Backwardation | Spot Price | Full glossary
DISCLOSURE
Alex Lexington provides this content for educational purposes only. This is not investment advice. Precious metals prices fluctuate and past performance does not guarantee future results.