CME Group has launched an additional physically delivered gold futures contract, Gold (Enhanced Delivery) futures. It is tradable under the commodity code 4GC.
The contract is physically deliverable, which means that upon expiration, gold is delivered to the buyer.
Unlike CME Group’s main gold futures contract, GC, 4GC contract specifications allow sellers to also use 400-ounce bars for delivery, in addition to 100-ounce and kilo bars.
The 4GC contract unit is 100-ounces, just like GC.
So how does delivery work when the contract unit is much smaller than the allowed 400-ounce bars? If a participant decides to use 400-ounce bars to match the delivery requirement, an additional step is needed.
When putting a 400-ounce bar in the delivery system, which is referred to as putting material on warrant, the 400-ounce warrant is exchanged into four accumulated certificates of exchange (ACEs).
Each ACE represents an equal share of ownership of the original 400-ounce bar. An ACE, ¼ of a 400-ounce bar, is equal to 100-ounces. That means that participants can now deliver an ACE to their counterparty to fulfill delivery requirements, just like they would use 100-ounce or kilobar warrants.
A customer that receives an ACE via the physical delivery process can reuse this ACE for later deliveries.
Once four ACEs have been accumulated, they can be exchanged for a 400-ounce warrant. This warrant represents ownership of the 400-ounce bar, which can remain in the respective depository or be loaded out at the customer’s discretion.
This is how the ACE mechanism works in principle. But there is an additional element we haven’t discussed yet.
Because not all gold bars are identical in weight, CME Group allows a certain degree of variance or “weight tolerance.” For example, 100-ounce bars may range between 95- and 105-ounces in weight. 400-ounce bars have a wider weight tolerance, as they can range 12.5% below or 7.5% higher than 400-ounces, that is between 350- and 430-ounces.
Because each bar is unique and customers can acquire ACEs from different-sized bars, it is possible that the cumulative number of ounces represented by those four ACEs may not be equal to that of the 400-ounce bar warrant received in exchange. In this case, CME Group will administer a cash payment to cover the weight difference. This allows customers to be sure that they receive the exact value of their Gold contract.
There you have it, 4GC futures are a more flexible way to trade and deliver gold. For additional information, please visit the Gold (Enhanced Delivery) home page.