Hedgers and speculators in gold futures market
Hedgers and speculators in futures market
The main function of any futures market is to present a centralized market for those who are interested in buying and selling physical goods at a certain time in the future. The metal futures market helps hedgers reduce the risk associated with poor price movements in the spot market. Examples of hedging include banks, vaults, mines, manufacturers and jewellers.
Hedgers are in the opposite position in the market. Given the price correlation between futures and spot markets, gains in one market can offset losses in another. For example, if a jeweler is worried that they will pay a higher price for gold or silver, they will buy a contract to lock in a guaranteed price. If the market price of gold or silver goes up, they will have to pay a higher price for gold / silver.
However, given that the jeweller has a large stake in the futures market, they could have made a profit on the futures contract, which will offset the increased cost of buying gold / silver. If the cash and futures prices of gold or silver fall respectively, the hedger will lose his futures position, but he will pay less for gold or silver in the cash market.
Unlike hedgers, speculators are not interested in receiving goods, but try to profit by taking market risks. Speculators include individual investors, hedge funds or commodity trading advisers (CTAs).
Speculators come in all shapes and sizes and can stay in the market for different times. Some people who often go in and out of the market call it yellow cattle. A day trader gets more time than a scalper makes a position, but it's not usually done overnight. A position trader gets several conversations. All speculators should be aware that if the market moves in the opposite direction, the position is likely to lead to losses.
Whether you're a hedger or a speculator, it's important to remember that market trading involves a lot of risk and is not suitable for everyone. While it is likely to be profitable for some people who trade in gold and silver futures markets, remember that it is best to give futures trading to traders who have the expertise needed to succeed in such markets.