Gold producers and refiners


Hedge the sale of gold


CME Group Gold futures and options 


The Role of Basis

The difference in price between a commodity futures price and its underlying spot physical price is known as basis. For example, if spot gold was trading at 2007.20 and the GCM3 futures contract was trading at 2016.4, the futures pricing would be above spot:

Basis = Futures price – spot price
Basis = 2016.4 - 2,007.20 = 9.20 premium

If a commodity futures contract forward price curve is higher over time – like in the example above – it is said to be in contango. If the futures price is lower than spot over time, it’s said to be in backwardation.

Commodity Futures Prices: Contango and Backwardation

For Gold futures, an understanding of the time value of money can help market participants arrive close to fair value. While a Gold futures contract isn’t an asset, its pricing reflects the time value of assets just like how gold prices consider factors such as storage, insurance, and transportation. Its pricing also considers the time value of money, or the equivalent risk-free rate on equivalent capital. A calculation that accounts for the equivalent risk-free interest rate versus the time to expiration can be used to see if futures are relatively fair priced.

For example, if GCM3 has 38 days until expiration, a RFR (one-month) is 4.96%, and spot gold is 2008.00, a trader could use the following calculation:

Pfutures = {[Pspot x 100 oz) x RFR x (days/360)] / 100} + Pspot

Pfutures= ((200,800 x 0.0469 x 0.1056)/100) + 2008.0 = 2018.5 (vs. last quote GCM3 = 2019)

Source: Spot price from; futures data from CME Group

Scenario 1: Futures Hedge


On February 1, 2023, a refiner agrees to sell 2000 oz of gold to a client based on a forward delivery date of February 28, 2023. The full payment for the gold will be made on delivery day. This means the refiner is exposed to some downside risk since it’s possible the price of gold will be lower at the end of the 28-day period.

As of February 1, 2023, the spot price of gold is 1914.51 and the nearby March 2023 contract (GCH3) is at 1934.3. The refiner can construct a hedge ratio using the standard Gold futures contract, which is 100 troy oz per contract:

Hedge ratio (HR) = Risk / Contract size

HR = 2000 / 100 = 20 GCH3 sell to hedge risk

The initial margin is approximately $9,200 per contract, so a minimum of $184,000 in margin would be required for this risk position.


Between February 1 and February 28, the spot price of gold fell from 1914.51 to 1836.53, or 77.98 per oz. 

GCH3 Contract Performance

Had the refiner not been hedged, this would have resulted in a potential loss of $155,960; however, the overlay of the short futures position resulted in a gain.

Futures contracts:
105.4 points x 20 contracts x 100 = 210,800
Transaction with client:
2000 oz x 77.98 per oz = 155,960
210,800 - 155,960 = $54,840 gain

The refiner’s short hedge position may have benefited as the futures price rolled down in its convergence to spot in addition to the price differential.

Scenario 2: Options Hedge


On May 1, 2023, a gold producer agrees to sell 10,000 oz of gold in July based on the prevailing August 2023 futures price. As of May 1, the spot price of gold is 1984.10 and the nearby August 2023 futures contract (GCQ3) is at 2009.9. Because of the physical delivery mechanism, options have to expire before the first intention day of the physically settled futures contract to ensure there is open interest. In this scenario, options for August will expire on July 26.

The gold producer uses the equivalent of the at the money 2010 strike price. The risk for the producer is lower prices, so they decide to buy a put, which represents the right to a short futures position. At this moment, the strike price has a delta of -.48. The gold producer then needs to identify the equivalent standard Gold futures contracts (100 troy oz per contract) to determine the number of puts they’ll need to buy.

Equivalent GCQ3 futures risk = 10,000 / 100 = 100 GCQ3 futures contracts

GCQ3 hedge ratio = futures / delta

HR = 100 / -.48 = -208

The negative number indicates the producer will be short the marketplace. The producer buys 208 OGQ3 2010 puts, which they are trading at a premium of $59.60 per option.

This requires a cash outlay of $1,239,680 (208 x 100 x $59.60) for the premium on the hedge. This is also the maximum amount this position can lose because the option risk is limited to the premium paid by the buyer. 


If the market traded lower in price over the period covered by the option itself, the premium on that option would likely increase at an accelerating rate. This is due to the asymmetrical relationship of options premium relative to the underlying, which is the futures price. The delta on the put position, which influences the pricing of the premium, in a price falling environment is going up at an accelerating rate, resulting in an increased value of the premium of the put option.

Possible Return on OGQ3 2010 Puts

Once the owner of the put covers the cost of the initial premium, the risk overlay kicks in for the long physical position that’s due to be delivered at the end of July.

Strike price – premium = Breakeven for the hedge

2010 – $59.60 = 1950.4 in GCQ3 price

Losses from a price break below 1950 will be increasingly offset by increased value in the long put position.


An understanding of basis, time value of money, and the physical delivery mechanism can help traders make informed decisions on how to use Gold futures and options to manage risk. Please note that not every market participant is capable of making or taking physical delivery, so clearing houses may require some traders to roll their contract forward to another further dated contract month to maintain exposure or offset the position.

Find your solution

Let CME Group help you find a solution to your challenge.

Watch a webinar on this topic:
A Golden Opportunity: Gold Futures and Options

Find out about other ways to hedge gold in another case study:
Range Bound Trading in the Gold Market

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.  

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