Understanding the Implications of the CME's New 1 oz Gold Futures

The CME is launching a gold futures contract to meet surging demand from retail traders, but it will only flood the market with more 'paper' gold.

CME Group Inc., the parent company of COMEX, the leading U.S. exchange for gold and silver futures, will introduce a one-ounce gold futures contract in January. This move comes in response to soaring demand from retail investors, spurred by gold's record-breaking rally this year from $2,000 to $2,630—a respectable 32% gain. Smaller-sized gold products have grown increasingly popular among retail investors seeking exposure to precious metals and greater diversification in their portfolios.

Jin Hennig, CME's Global Head of Metals, described the one-ounce gold contract as “a great way to lower the barrier to entry in our market.” She also noted, “Our clientele is also getting younger. That’s a lot more doable.”

The one-ounce gold futures contract is set to launch on January 13, 2025, pending regulatory approval. This new offering complements CME’s existing retail-focused products, including 10-ounce micro gold and 1,000-ounce micro silver futures, which represent smaller fractions of the standard benchmark contracts. According to CME, these micro contracts have been among the fastest-growing products in their metals derivatives lineup, achieving record trading volumes this year.

CME anticipates strong demand for the new contract from retail investors in Asia, where gold is deeply ingrained in the culture as both a store of value and a hedge against economic uncertainties. Hennig emphasized that the contract provides "a meaningful way" for individual traders in the region to "manage their own wealth creations."

While the introduction of this new futures product is intriguing and reflects growing interest in precious metals and financial innovation—something I wholeheartedly support as a proponent of free markets—I do have some concerns. Chief among them is the fact that this is a cash-settled futures contract rather than a physically-settled one. This means that upon expiration of the futures contract, traders cannot take physical delivery of a 1-ounce bullion bar or coin, which is a drawback for those seeking tangible ownership of gold.

This also implies that these contracts are unlikely to be backstopped (even unofficially) by actual physical gold, making them yet another form of "paper" gold in a market already saturated with such instruments that include futures, options, forwards, swaps, CFDs, and exchange-traded funds. Currently, it is estimated that there are an astonishing 133 ounces of paper gold for every ounce of physical gold, as illustrated in the chart below. This imbalance poses several concerns, chief among them the heightened risk of a future run on physical gold. Such a scenario could see the price of scarce physical gold soar while the value of paper gold plummets, creating a significant market shock.

Paper gold—especially when it vastly exceeds the supply of actual physical gold—undermines some of the core advantages of owning physical gold, such as its simplicity, and its freedom from counterparty and default risk. This concept is well illustrated by Exter's Pyramid, where rare physical gold (not paper gold) occupies the base of the inverted pyramid as the most secure and reliable form of collateral. In contrast, paper gold falls into the far riskier and more abundant derivatives category near the top of the pyramid. This starkly contrasts with physical gold's role as the ultimate foundation of financial stability at the bottom of the pyramid.

Image source: https://en.wikipedia.org/wiki/John_Exter

Another significant concern is that the proliferation of paper gold products tends to divert and diminish demand that would otherwise flow into physical bullion. Many analysts argue this is a key factor keeping gold prices lower than they might otherwise be. While the new 1-ounce futures contract makes gold more accessible to investors with moderate means—allowing them to control the equivalent of a $2,700 ounce of gold with only a few hundred dollars in margin—it raises concerns. This easier access may further shift demand away from physical bullion, which represents the true, tangible market for gold.

Bob Coleman, founder of Idaho Armored Vaults, highlighted that a 1-ounce gold futures contract could have been an excellent innovation if it were physically settled. Such a product would have helped reduce spreads and transaction costs in the physical bullion market while enhancing market transparency and liquidity. However, Coleman lamented that CME Group opted to make this contract cash-settled instead, missing an opportunity to provide these benefits:

Vince Lanci, publisher of the GoldFix newsletter, humorously suggested in a post on X that CME Group's new 1-ounce gold futures contract could drive down premiums on small gold bullion products. While this development would benefit consumers, it would also erode bullion dealers’ profit margins.

The introduction of CME Group’s 1-ounce gold futures contract seeks to address growing retail investor demand and expand access to the gold market, but it also underscores critical challenges tied to the dominance and proliferation of "paper" gold. With its cash-settled structure and lack of physical backing, the new contract raises concerns about transparency, reduced demand for physical bullion, and the broader stability of the gold market. While it lowers barriers for younger and global retail investors, its potential to divert interest from physical gold risks deepening the disconnect between paper and physical markets. As the market evolves, balancing financial innovation with the enduring value of tangible, secure, and stable assets like physical gold is crucial.

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