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Precious Metals: ETFs vs Futures

Gold is hanging around its most expensive prices since futures on the commodity started trading almost half a century ago in 1974. While the price levels have increased, the action around gold has not. Volatility has only risen slightly in gold products, and it is in fact still below its historical average. As gold feels out new highs in a more calculated manner, its metallic companion silver has almost doubled in volatility.

Source: dxFeed Index Services (https://indexit.dxfeed.com)

Whether it’s by price extremes or large moves, the curiosity of many stock traders is piqued. But those familiar with stocks may have a hard time finding the right precious metal product to speculate on since the choices vary widely in exposure, size, and look.

Metals or Mining Stocks?

Exchange-traded funds (ETFs) that package stocks in the mining business might be the easiest first venture into metals, but ETFs such as XME and GDX can diverge greatly from the commodity itself. Their correlation to the equity market can push them one way as metals pull them the other creating significant long-term deviations.

Source: dxFeed Index Services (https://indexit.dxfeed.com)

Some ETFs that track commodities more closely, like GLD and SLV, can be heavy on capital usage. For example, the shares needed to see daily movement in an SLV position greater than $50 would cost between $1,000 and $2,000. These expensive ETFs make large returns on capital difficult to attain.

Capital Efficiency at What Cost?

Futures contracts on gold and silver can offer large fluctuations for smaller capital requirements than stocks and ETFs, but traditional metal futures such as /GC and /SI can be too large for the everyday investor. Both markets have seen daily moves exceeding $2,000 just in the last week, and silver futures have made multi-thousand dollar moves a regular event.

New futures products like Small Precious Metals (/SPRE) present smaller investors the capital efficiency of futures at a more manageable rate than traditional products. The product moves close to $100 on the average day, and its initial margin is usually around a few hundred dollars. Also, it combines gold and silver into the same product, so you don’t have to decide on which precious metal to trade.

Source: dxFeed Index Services (https://indexit.dxfeed.com)

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the “risk disclosure” webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

About Frank Kaberna

Frank Kaberna is the head content strategist at the Small Exchange. He produces everything from brochures to videos that inform on the Small Exchange’s products. After earning a mathematics degree from the University of Michigan, Frank traded interest rates at the Chicago Board of Trade. He then worked on the tastytrade Network as a content producer and on-air talent before landing at the Small Exchange.

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