Final answer:
Entering a contract to buy gold at market prices subjects the investor to current market fluctuations. Simultaneously, entering a futures contract at a fixed price can provide financial benefits if the market price is higher than the contract price. Typically, the actual gold is not physically possessed but is represented by contracts.
Step-by-step explanation:
Understanding Futures Contracts and Market Pricing
When an investor enters into a contract with a supplier to acquire 10,000 ounces of gold each month at market prices, they're subject to the fluctuating costs of gold on the open market. For instance, if the market price in January is $1,400.00 per ounce, the investor would be agreeing to purchase the gold at this rate, resulting in a monthly cost of $14,000,000.
In parallel, engaging in a futures contract with a financial institution for 10,000 ounces of gold at $1,200.00 per ounce locks in a price that is below the current market price. This type of contract is a financial tool investors use to hedge against market fluctuations and protect their investments.
Should the market price be above the futures contract price, the investor would benefit financially as they would be acquiring the gold at a rate lower than the market value. Specifically, at a market price of $1,400.00 per ounce, the savings per month would be $2,000,000 ($200 per ounce x 10,000 ounces).
The physical result of these contracts isn't typically the actual possession of the gold. Often, the gold is stored elsewhere, and the contracts are merely financial instruments representing ownership. The investor may later sell these contracts or the claim to the gold, hoping for a capital gain if the market price remains favorable compared to the contracted price.