Introduction to Futures

Trading Non-Physical GoldLearn to TradeAchieve SuccessEnriching Lives, Realizing DreamsJalatama ManagementThe Origins of the Futures MarketsModern Day Futures MarketsWhy Gold?The Benefits of Non-Physical GoldReturn & Risk Management Futures Industry Structure & How Jalatama Fits InWhy Jalatama Management?

Todays AgendaThe Origins of the Futures MarketsHistoryFutures derived from a farmers need to secure a price for their crops that would cover their harvesting costs.

This bargain suited both parties - the farmer guaranteed a price for harvesting his crops and the buyer knew his costs in advance.

Such contracts became common. If neither party wanted to follow through with the deal they could pass on the obligation to another farmer or buyer.

The prices of crops would go up and down depending on the weather. It was quickly realised it was possible to make money trading these commodities without any intention of delivering and/or receiving the goods

Modern Day Futures MarketsDifferent Uses of Futures MarketsFutures have evolved into an efficient platform for a variety of usesDifferent types of market participantsHedgers Manage risk. Oil producers, mining companies etcSpeculators Short term positions to profit from two way price movementsInvestors Longer term positions expecting price gainsArbitrageurs Profit from price discrepancies between daily spot and futures markets

Futures Vs Spot PriceSpot price is the price paid for gold at the present timeFutures price is the price paid at a specified date in the future and incorporates the sellers cost of carry (storage and insurance).In normal market conditions, the cash price will be lower than the futures price due to the expenses related to carrying the commodity until deliveryFutures Contract Pricing

SpeculatorsRisk TakerSpeculatorsRisk TakerBuy Hedge:Buying Price CertaintySell Hedge: Selling Price CertaintyFutures PriceSupplyDemandPrice ReferenceBusiness DecisionHedge PositionFutures PriceEquilibriumCapital GainCapital GainFutures Basic:Spot + Carry Cost = FUTURES PRICEInvestor: Buying for diversification & capital gainsWhy Gold?History of GoldFor thousands of years, gold has been valued as a global currency, a commodity, an investment and simply an object of beautyGold has attracted investors throughout the centuries, protecting their wealth and providing a 'safe haven' in troubled or uncertain timesIt offers investors insurance against extreme movements in the value of other asset classesWhy Investors Buy GoldLimited SupplyIntrinsic ValueA CurrencyA CommoditySafe HavenMore stableInflation HedgeOf all the precious metals, gold is the most popular as an investment

Growth, Recession & UncertaintyAs gold is a widely used industrial commodity it benefits during economic boomsGold also benefits during downturns due to falling real rates and currency debasementsGold is invariably the destination for flight to safety scenarios during global tensions

Long Term OutlookLow real rates in major Western economiesCurrency warsGrowing demand from India and ChinaLong term gold is well positioned to make substantial future gains

Short Term OutlookAdjustment to monetary policyChanges in sentiment to risk takingTechnical analysisShort term golds price will fluctuate providing opportunities to maximise profit

Maximise ProfitShort Term FactorsUSDRisk ToleranceTechnical AnalysisFluctuating DemandMonetary PolicyEuro IssuesThe Benefits of Non-Physical Gold InvestmentHow To InvestPhysicalJewelleryBullionCoinsNon-PhysicalSpot GoldFuturesETFs

Disadvantages of PhysicalHigher investment requiredJewellery designs increase priceJewellery shops add 15-20% premiumGoldsmiths can be dishonest regarding purityStorage and insurance costs are higherTime consuming to buy and sellAdvantages of Non-PhysicalLow capital requirements margin tradingMuch higher % capital gainsEfficiencyTwo-way market

How to trade?Two concepts you need to understand: Margin trading Two way trading

Margin tradingMargin trading is a facility provided to you in order to conduct a transaction where the contract / trading value exceeds the paid-in capital.Margin in gold trading serves as collateral that you pay to the futures brokerage company as a security deposit. This indicates the investor is able to meet any payment obligation.E.g. If you want to trade the worth of 300k, you only require the margin 1k, depend of the leverage set 22Two way tradingBasic principle of the two-way opportunity is opening a position that reflects market propensityOne buys (buy new) when they believe the price will increase (bullish) and closes by selling (sell close) when the price is higher One sells (sell new) when they believe the price will decline (bearish) and closes by buying (buy close) when the price is lower23

Sell Close, 1518Buy New, 1500Sell New, 1515Buy Close, 1490PROFITPROFIT24

Comparison between Gold trading and other kinds of investmentComparisonFixed depositPropertyStockGold TradingInvestment/capital valueSame as savings/time deposit valueSame as projects capitalSame as stock priceCan be 1% of contract valueFunds userBank and companies' businessesProject or factory owners creditPublic company/public companys managementOwner of the funds (investor)Procedures and requirementsSimpleComplexSimpleSimplePeriod to return capital and profitTime-limitedShort term and long term (5 years, 10 years, etc.)It depends on investing publics interest, supported by the credibility of companiesProfit and capital can be withdrawn anytimeProfit potentialIt depends on the banks interest rateAfter a few years or after the break even point is reachedWhen stock price increasesIt can be gained both when price is up and down in reference to the initial opening position with unlimited profitHow to do?You only saveYou only buyYou only buy when price low and sell when price highTwo way you can buy and you can sell26Return & Risk ManagementCalculating P&LCurrent Price = $1400 per troy ounce1 troy ounce = $1400100 troy ounces = 1 Gold Futures contract1 USD movement = $100 change in value per contract

ExampleInvestor buys 6 contracts at $1400Investor sells (liquidates) 6 contracts 2 days later at $1415$15 x $100 x 6 contracts = $9,000 ProfitReturn on CapitalPhysical Market Return on CapitalActual value of 600 troy ounces 600 x $1400 = $840,000Zero leverage/Full Amount Paid = $840,000Sell Price $1415 = $9,000 PROFITROI = 1.07% Non-Physical Return on InvestmentActual Value of 6 contracts at $1400 600 x $1400 = $840,0001 contract = $500 margin/deposit6 contracts = $3000Sell Price $1415 = $9000 PROFITROI = 200%

Almost 150%. This return can increase further via two-way trading futures marketsRisk ManagementNumber one focus is limiting lossesAutomatic stop lossesTechnical analysis for appropriate exit strategiesRisk/Reward Ratio 1:224 hour on-call account managerShort Vs Long OpportunitiesShort trades can produce great returns in short amount of timeFear and panic leads to sharp downtrendsThese downtrends can be easily identified before they happenLong trades can lead to substantial returns but over a longer period of timeUpward trends occur as investors gradually add more to their long positions causing a steady risePrice moves in a steady manner as more market participants become aware of the uptrendReal Example of a Successful Short Trade7th to 10th May

6th May sell signal 7th May client sells$1459$1470Profit target$1420$9000 margin for 18 lots$109,500 profit1117% Return on Investment

10th May client liquidatesReal Example of a Successful Short Trade15th to 20th May

$142015th May sell signalSupport area $1423 to $1420Price breaks through support on 7th attempt1st Profit target $252nd Profit target $70Minimum trade of 3 lots1st Profit target = $7,5002nd Profit target = $21,000