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Commodity Trading: Gold Futures

Overview

Gold has a long history of being a store of value. Gold’s use as a medium of exchange predates the Roman Empire and its use as a basis for currency was not limited to western societies. The Chinese and Hindu cultures used Gold as the basis for their coinage also.

In 1816, Great Britain adopted a gold-backed paper currency and the rest of the industrialized world shortly followed suit. Prior to 1934, the United States Dollar was equal to 1/20^th of an ounce of gold, redeemable upon request. Except for a brief halt of conversions from dollars for Gold during World War II, the United States Dollar was backed by Gold under an agreement known as the Bretton Woods agreement. Under Bretton Woods, the United States Dollar, and other global currencies, were tied to a value of Gold. From 1934 to 1968, this amount was $35/oz of gold. To protect the amount of Gold held in reserve for protecting the dollar, it was illegal for United States citizens to own Gold prior to President Nixon’s revocation of the Gold Standard.

Upon revocation of the Gold Standard, Gold became a popular investment medium, and the price rose from roughly $35/ounce to $800/ounce during the turbulent 1970’s. During these times Gold took on the aura of being a safe haven of value against inflation and world turmoil.

The Gold Fix

London has been the center of Gold trading since the 17^th century. The Australian Gold rush of 1852, and the discovery of Gold in South Africa in 1886, solidified London's grip on the Gold market as Gold from these locals channeled through London for refining and distribution. As a center for distribution of Gold, London began a method for disseminating the price of Gold known as the "Fix" in 1919. Held at N.M. Rothchild's at 10:30 am (Morning) and at 3:00pm (Afternoon) Fix. The Fix is a single price for Gold where the members, or Fixing Seat Holder's, match up their entire buy and sell orders. The price at which the most buy and sell orders match, or balance, is known as the Fix. The strength of the fix is that a large volume of physical Gold can be bought or sold at a single, clearly posted price. The fix is a benchmark price for many transactions worldwide, whether for mines, fabricators or central banks, because it is undisputed prices at which all six of the largest Gold trading houses are willing do business.

SPONSORED BY:

Commodity Trader's Almanac 2008
Scott W. Barrie
Best Price $26.37
or Buy New $26.37

Disclosure of Risk: The risk of loss in trading futures and options can be substantial; therefore, only genuine risk funds should be used. Futures and options ARE not suitable investments for all individuals, and individuals should carefully consider their financial condition in deciding whether to trade. Option traders should be aware that the exercise of a long option would result in a futures position.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MOST CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED IN THE PAST 15 YEARS. THERE ARE USUALLY UNDERLYING, FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR YEAR. EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST, OR WILL IN THE FUTURE, ACHIEVE PROFITS USING THESE RECOMMENDATIONS. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.