Cash and Futures Cash and Futures for Metals for Metals MarketsMarkets

Whenever you care about Whenever you care about Futures Trading, especially Futures Trading, especially trading in metals, the trading in metals, the knowledge about Cash and knowledge about Cash and Futures for Futures for Metals MarketMetals Market, , will help in your work.will help in your work.

Why do we need to learn about Why do we need to learn about Cash and Futures? You know, Cash and Futures? You know, when trading commodity futures when trading commodity futures markets, to know the difference markets, to know the difference between actual between actual cash pricescash prices vs. vs. futures market pricesfutures market prices is is essential. Let’s see what are essential. Let’s see what are they.they.

The futures market prices are The futures market prices are what you see in the what you see in the NYMEX/COMEX.  The particular NYMEX/COMEX.  The particular commodity tradingcommodity trading at in the at in the future is what it is.future is what it is.

While cash prices are what the While cash prices are what the actual commodity is going for at actual commodity is going for at a certain price in the real a certain price in the real market. (For example, a plumber market. (For example, a plumber has copper inventory which is has copper inventory which is stored for use in his plumbing stored for use in his plumbing business.)business.)

There is a certain cash price for There is a certain cash price for his copper that may be higher or his copper that may be higher or lower than what the lower than what the futures marketfutures market might be going might be going for. for. 

You may wonder why it must be You may wonder why it must be done in this way. You know, the done in this way. You know, the futures market was established futures market was established for this type of user so that he for this type of user so that he can hedge himself against the can hedge himself against the price fluctuations of his price fluctuations of his inventory of copper.inventory of copper.

He will have a big time business He will have a big time business and store a huge amount of and store a huge amount of copper in a warehouse. There is copper in a warehouse. There is a specific cash price that has a specific cash price that has been paid for all of the been paid for all of the copper. Over time the price of copper. Over time the price of copper is going to increase or copper is going to increase or decrease depending on supply decrease depending on supply and demand.and demand.

We now think of the possible We now think of the possible cases. If the price of his copper cases. If the price of his copper increases, that will be beneficial increases, that will be beneficial to him. Simply, then he can go to him. Simply, then he can go out and charge for a higher price out and charge for a higher price to his customers for the work to his customers for the work done. done. 

For example, the plumber paid For example, the plumber paid around $1.37 per 25,000 pounds around $1.37 per 25,000 pounds of copper and now the cash price of copper and now the cash price has increased to $1.45. He is then has increased to $1.45. He is then going to make 8 cents on his initial going to make 8 cents on his initial investment on top of the billing of investment on top of the billing of the work that he puts out.the work that he puts out.

But, how about if the situation But, how about if the situation will go in the opposite way - The will go in the opposite way - The price of copper falls? Think of price of copper falls? Think of the above example in the the above example in the different case - The price of different case - The price of copper is trading $1.30 and he copper is trading $1.30 and he loses 7 cents!loses 7 cents!

Yes, he won’t be able to get any Yes, he won’t be able to get any profit because the money he profit because the money he makes doing the plumbing won’t makes doing the plumbing won’t even offset the loss he has even offset the loss he has suffered with the cash price.suffered with the cash price.

Anyway, the plumber needs to Anyway, the plumber needs to consider that the futures market consider that the futures market is essential to do his business, is essential to do his business, because now he can hedge the because now he can hedge the actual copper that he owns by actual copper that he owns by taking an opposite futures side.taking an opposite futures side.

In what way? The plumber hedges In what way? The plumber hedges with a short position in the futures with a short position in the futures market so now if the price of market so now if the price of copper goes down he will have copper goes down he will have covered his actual losses with covered his actual losses with gains on the short. gains on the short. 

The hedges are not always The hedges are not always perfect as some might come out perfect as some might come out with a minor gain or a minor with a minor gain or a minor loss. loss. 

The fact of the matter is that our The fact of the matter is that our man can still operate his man can still operate his business even if the price of business even if the price of copper should happen to fall.copper should happen to fall.

To end up, as usual, I would like To end up, as usual, I would like to say that trading in futures and to say that trading in futures and options involves a substantial options involves a substantial risk of loss and is not suitable for risk of loss and is not suitable for all investors. Past performance all investors. Past performance is not necessarily indicative of is not necessarily indicative of future results.future results.