By Lara Crigger
Much of the media buzz around gold these days centers on ETFs
and physical bullion, but don't overlook another way to get your
precious metals fix: futures contracts. Both the NYMEX and NYSE
Liffe US (the US futures exchange of NYSE Euronext) offer futures
contracts, in standard, 100-ounce and "mini" 33-ounce sizes.
Futures contracts aren't as arcane or complicated as they
seem, but you should keep a few things in mind before investing,
says Jennifer Ropiak, vice president at NYSE Liffe US, NYSE
Euronext's US futures exchange.
Since 2008, Ropiak has managed business and product
development for the exchange's gold and silver futures and mini
futures contracts. Prior to joining NYSE Liffe, Ropiak worked at
a CTA and at a small hedge fund specializing in gold. She has
over 20 years' experience trading and marketing precious metals,
including stints at Morgan Stanley, AIG and Dresdner Bank.
Recently, HAI Associate Editor Lara Crigger sat down with
Ropiak to get her perspective on the mini futures market,
including why silver mini futures have seen a bump in open
interest, what new investors should consider before buying a mini
futures contract, and whether proposed government regulations
would send derivatives business overseas.
Crigger: Given gold's trajectory over the past several
months, how has volume or open interest changed in the gold mini
futures market? Or, for that matter, the silver mini futures
We're seeing a lot of active trader and retail trader flow.
I think that is because the sharp rise in price has made the
full-sized contracts less appealing to some traders.
But people still want to have some exposure to precious metals
prices, so they're using our mini gold contract [which is 33.2
ounces], as opposed to the 100-ounce gold contract.
Our mini gold contract volume is up 71 percent from this time last
year, and our open interest is up 75 percent.
Average daily volume in June is about 10,000 contracts.
We have also seen much more interest in mini silver: Our mini
silver contract is 1000 ounces, versus a standard contract, which
is 5,000 ounces.
Mini silver has averaged a daily volume in 2010 of 3,200 contracts,
which is up 25 percent from 2009.
Crigger: Are the increased inflows a direct result of
gold's price rise? Or are investors judging silver's fundamentals
separately from those of gold, and moving into the metal
Many people view silver as "poor man's gold," and as a cheaper
item, I think silver is benefiting from the interest in the
precious metals complex in general.
But on the other hand, silver is an industrial metal, too. So at
certain times, depending on economic sentiment and the
fundamentals, silver prices can
move on the back of either gold prices or copper prices.
Crigger: So six of column A, half a dozen of column
Exactly. If you feel the economy will recover strongly, you might
want to be long in silver, because it's an industrial metal. Also,
silver prices are more volatile than gold prices, so if you think
precious metals prices are going up, you might choose to buy
silver, because you would expect it to have greater percentage
gains than gold prices. But you might choose the reverse, and buy
gold if you believe the economy's still going to have difficult
Crigger: Certainly what happens next is still up in the
air, given the eurozone crisis overseas. How do you think inflows
into both silver and gold futures will reflect this uncertainty
over the next couple of months?
What we have read from many analysts is that people who had [[GLD]]
[the SPDR Gold Trust] in their portfolio since its launch five
years ago definitely saw a diversification benefit. People looked
into their portfolios and realized, "This works."
So as more and more Americans learn about gold and silver's
portfolio diversification benefit, and the market looks for
different ways to participate, I think that our mini gold and mini
silver futures contracts will only benefit. A lot of analysts say
that you should have 5 or 10 percent in precious metals in your
portfolio, and of course, mini gold and mini silver futures are a
great way to achieve that.
Crigger: But many investors are warned away from trading
mini futures, either because they're too difficult for novices,
or because of liquidity or risk concerns. Should only
sophisticated investors be dealing in these contracts?
Certainly brokers should have strict standards they'll follow
before they let a client open a futures account.
And when someone starts to trade, they usually first start in
equities, and then learn about options and futures.
It is important that the investor has a solid understanding of
the power of leverage. For example, to take a position in mini gold
futures, you only have to put up about 6 percent of the current
value of the contract. The current value of the contract is about
$40,000. The initial margin is $2,248. Then every day after that,
you reap the full benefit or full consequence of the movement in
So if the price moves $2, depending on your position, you will have
a positive or negative mark-to-market of 33.2 ounces, multiplied by
$2, or $66.40.
That leverage is something that a lot of active traders appreciate.
With a mini futures contract you can get that exposure to gold, and
the balance of the value of the contract - that 94 percent - you
can put into an interest-bearing vehicle or another investment.
Leverage is powerful, but you definitely do have to understand how
Anotther advantage of these futures is that it's possible to
actually take physical delivery. If you're long three mini gold
contracts, you can stand for delivery and receive three Warehouse
You can then swap these WDRs for a vault receipt, which allows you
to remove the 100-ounce gold bar from the exchange-approved vault.
The same is true for mini silver, but you need to have 5 WDRs to
remove silver from an exchange-approved vault.
If you are long less than 3 mini gold (or 5 mini silver) futures
and stand for delivery, you will receive WDRs that are backed by
the real metal stored in exchange-approved vaults, but you won't be
able to remove the metal.
There are other futures exchanges with precious metals mini
futures, but their volume is negligible in comparison to ours. I
think the reason that we [NYSE Liffe US] have the most volume and
open interest is that our contracts are actually backed by physical
Crigger: Certainly there's been increased desire from
precious metals investors to be able to take that physical
I think Americans are genuinely concerned about their future, and
gold is considered by many as a store of value. But prior to the
launch of GLD, if you were interested in owning precious metals in
the US, outside of being a coin collector, it was almost
But in Asia, India and Europe, it is
common to be invested in gold and silver, and it has been the case
for a long time.
Silver for Indian dowries is a classic example, but globally,
individual investors have been very comfortable with precious
metals for a very long time. We as Americans are simply catching
Crigger: We're behind the curve.
Indeed. If you look at some of the numbers of the
physical trade of gold over the past couple of years you'd see
that, ironically, while there's been a rise in Western investments,
the Chinese, Japanese and Indians have been selling some of their
holdings into this rally. The East has been selling into this rally
to the West.
Crigger: Of course,
the World Gold Council
said that China and India will remain the real
heavyweights of gold demand for the foreseeable future. Rising
demand in the States won't really make a dent, not compared to
the level the Chinese and Indians are buying at.
Well, there's lots of levels that could contribute to the buy side.
There's the individual level,
the institutional level and the level of the central banks.
For a long time, the central banks were only concerned about the
amount of dollars they had in their reserves. Now they're concerned
about the amount of euros they have in their reserves. So what can
they do to diversify? One option over time is to buy gold.
Crigger: So do you have any plans at the NYSE Liffe to
launch any other precious metals futures contracts? For example,
we've seen a major rise in investor interest in the platinum
group metals, especially since the launch of the platinum and
We are absolutely looking at that market. But the regulatory
authorities - in this case, the CFTC - would want to be assured
that the deliverable supply is plentiful enough. When you start
contracts, the first thing that's always asked is about the
deliverable supply. So before anything happens, the CFTC would have
to feel absolutely comfortable that there would not be a squeeze in
a recent interview
, Jim Rogers said when it comes to the new proposed
regulations for the derivatives market, the US is "shooting
itself in the foot," and that we're essentially just "giving
business away" to the rest of the world. Do you agree? If the
government imposes new regulations, will the market just shift
That's the great dilemma, of course.
In the precious metals ETF universe, GLD has all the volume. Why?
People all over the world, whether they're in Europe or Asia, use
the United States' ETF, because they like the regulatory framework
that's in place for securities.
But if there are going to be a lot of changes to the rules
governing the futures and over-the-counter markets, there could be
a risk of volume fleeing to more opaque markets.
In other parts of the world, banks feel strongly about protecting
their clients' privacy, and they may not welcome the ability for an
American regulatory body to inspect their books.
Our role at NYSE Liffe US is to offer a transparent market. We look
forward to our continued growth, as more volume looks to go on
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