With today’s markets, it is possible to earn a substantial profit trading commodities like gold without owning the actual metal. Trading gold through CFDs is the opening of an impermanent order to buy or sell a precise amount of gold. Throughout the contract duration, the movement in the price of the gold metal determines the profit or loss. People are attracted to gold- that is an inevitable fact!. Gold has been utilized as a currency since it does not destroy. The material also permits light to be absorbed into it which creates that yellow glow. The value of gold changes from time to time, because it trades on public exchanges, where supply and demand determine its price.
A brief history on Gold trading.
Since primitive times gold was one of the primary metals that were mined. Primarily because of the form it was found in, that is as small pieces or nuggets at the bottom of a river. Its demand was high such that Egyptians began to mine it in 2000 BC. Throughout history, a lot of civilizations picked gold as a dependable form of money for trading goods worldwide.
The gold standard. The monetary structure for which the economic currency utilized gets support from the gold reserves of the country issuing. It came to be, because of the acknowledgment of gold as an actual currency. The United Kingdom and the whole British Empire abandoned it when World War I started. Most of the other countries followed suit during the 20th century.
Why is Gold quoted mostly in US dollar?
You can purchase gold with any currency in the world, but you must understand that everything revolves around the US dollar value at the end of the day. The United States of America is the largest economy in the world and is among the most stable. Hence the dollar is now a reserve currency. This means that significant institutions and other governments hold it in large quantities. The use of reserve currencies is in settling international transactions. Ever since the 20th century began, the dominant reserve currency worldwide has been the US dollar.Falling US Treasury Yields are good for Gold…Why?
Investing is about the allocation of assets as well as risk-adjusted yields. Concerning asset allocation, it focuses on attaining required returns based on the investor’s needs and wants. Fixed income will tend to underperform if inflation expectations increase rapidly. Who would want fixed returns when prices are escalating? Realistically you would get returns that are lower than intended. One can identify returns in the market by real yields. The real yields inflation is adjusted by, the US Treasury 10-year yield subtracts of the core inflation rate.Why is this relevant?
For example, let’s assume the US Treasury 10-year yield is 2.6% at present and inflation is at 2.2%. The actual interest rate is 0.4%, and the nominal interest rate is 2.6%. If inflation shoots up abruptly to 4.6% as US yields remained steady, the real interest rate will change to -2%.Why do people trade gold?
Today, trading gold is almost the same as trading foreign exchange. If a retail investor goes on a spread-betting platform, it is merely to buy or sell depending on whether you believe that the gold price is likely to go up or down. For certain people, trading gold is appealing just because the asset is physical and not only a number in a bank account. The reasons people are trading gold are; to create the demand and supply respectively, to acquire or distribute physical gold, for commercial use or hedging. However, For traders, the reason for trading gold is so that they can profit from its price movements.What are the different forms of Gold available to traders and investors?
Physical metals (bullions or coins)
Billions are a bulk or grouping of precious metal. They are measured in a bar and weight.
Gold certificates
Gold certificates are almost the same as the first paper bank notes. Since the 17th century, gold certificates represented gold ownership and were like cash payments. Today they are still supplied by particular banks and signify an amount of gold bullion or coins for its possessor.Gold Futures
These are contract agreements for the delivery of gold at a set price in the future. Investors make use of this in the management of price risk. Because the trading of gold futures contracts takes place at centralized exchanges, these contacts have more leverage and flexibility in comparison to trading commodities themselves.Gold-based ETFs
With the impression that gold will continue to provide good returns, the exchange-traded funds (ETFs), are managed by the experts of gold trading. They could possibly offer a better opportunity to earn more, than if you were trading by yourself. Note the price of gold will still continue to affect the ETF.Contracts for the difference
CFDs are appropriate for traders and not for investors. This derivative gives a chance to profit from the gold price movements throughout the contract duration. That is with no right or obligation to buy the actual underlying asset. The nature of CFDs permits shorting gold as well as trading it on a margin.Gold trading-Futures markets
Day trading gold is gambling on its short-term price changes. Physical gold is not really possessed or handled, rather the transactions are electronically conducted, and merely profits or losses are shown in the trading account. There are several methods of gold trading. The principal method is through a futures contract. Purchasing a gold futures contract does not mean that you actually have to possess the physical commodity. Day traders close all trades each day making profits from the difference between the buying price and the selling price of the contract. The Chicago Mercantile Exchange (CME)is where gold futures trade. There is (GC) standard gold future that represents 100 troy ounces of gold, then there is (MGC) micro gold future, that represents 10 troy ounces. On the futures exchange, gold increases by $0.10 only every change. This increment is known as a "tick"--it is the tiniest movement a futures contract can make. If you sell or purchase a futures contract, the number of ticks the price changes further from your entry price controls your profit or loss.Gold Futures
The amount required in your account for day trading a gold futures contract depends on your futures broker. For day trading a standard Gold Futures contract, you require $1000 plus additional money to accommodate losses. The funds your broker needs to open a day trading position is the Intra-day margin. It is subject to change and varies by the broker. This figure is assuming you are day trading and closing out positions prior to the market close each day. If you hold your positions overnight, you are vulnerable to Initial Margin and Maintenance Margin requirements. This will require you to have more money in your account.Impacts of Gold Price
People buy and sell most physical gold over the counter (OTC), meaning it is bought and sold through a dealer network instead of a centralized exchange. In the UK the price of gold changes daily, together with the euro and British Pound exchange rate, called the spot price.
Similar to most commodities, the gold price usually depends on the supply and demand. Gold it is used these days in medical devices, in the manufacturing of electronics, in jewelry and investments. Therefore it is a precious metal which is in high demand. Nevertheless, the price of gold still swings back and forth.
The relationship between interest rates and gold price
A more straightforward way to look at it is that gold does well when the supply of money is growing faster than gold can be mined. When the money supply shrinks, gold is less desirable. The gold and interest rate relationship is nowhere near as clear-cut as Economics 101 would suggest. First of all, fiat money—a paper currency not backed by gold/silver—hasn’t existed for long in human history It has since been a widespread belief that interest rates have a major impact on the gold price. at first glance, this could be viewed as a fact. If interest rates were to increase, then logically the appeal of bonds and savings accounts should rise and demand for physical assets decreases. However, In reality, there is no statistical evidence to support this mainly because there are lots of other factors that drive the prices of gold.How does the stock market influence gold price?
Less than 50% of the time, the gold price has a tendency of moving in opposite directions to the stock market. Comparing the 12-month collaboration between gold and the S&P 500 Index over the last five decades, the average is zero. This is the ultimate reason why gold can aid in constructing a more substantial investment portfolio. A portfolio that does not depend on stocks and shares only, as investors can reduce the risk of all their assets escalating and falling instantaneously.Impact of the US dollar on the gold price
The US dollar is a benchmark often used in quoting natural resources, and the same applies to gold. Although it has been recognized that when a dollar is weak gold price increases by about 60% of the time. This is not always the situation, however, and in the latest years, we have witnessed the gold increase in value together with the dollar.Day Trading Gold, ETFs and/or Stock Market
Another technique for day trading gold is through a fund that trades on a stock exchange, such as the SPDR Gold Trust (GLD). With a stock trading account, you can trade the price changes in gold.
The trust keeps gold in reserve; therefore the value is reflective of the gold price. The SPDR Gold Trust price is roughly 1/10 of the gold price. Therefore if gold futures are trading at $1500, that means the Gold Trust will trade at about $150.
The trust trades just like any stock. The least price movement is $0.01, so you make or lose $0.01 on each share you have every time the price shifts by a penny. ETFs and stocks are usually traded in 100 share blocks known as lots. That means if you are holding 100 shares when the price moves a penny, you make or lose $1.
If the price changes from $120 to $121, you profit or lose $100 on your 100 share position. However, If you have 500 shares, you gain or lose $500 on that same price movement. The sum you need in your account for day trading a gold ETF is dependant on the ETF price, position size, and your leverage.
Trading gold vs trading forex
Chart fromU.S. Global Investors.
Traditionally gold has been considered a store of value, precisely because it is not as vulnerable to the impulses of central banks and governments as currencies are. Gold prices are not swayed directly by monetary policy nor fiscal policy and will continuously be worth something. On the other hand, a currency gets to the point of being worthless due to rampant inflation for example.
Gold can be used as a “safe haven” among assets such the Swiss Franc, Japanese Yen and the bonds and notes given out by the US Treasury. This ultimately means that when traders are concerned about risks, they will incline to buy haven assets. On the other hand, traders have a tendency of selling haven assets when the appetite for risk increases. They will instead opt for other currencies and stocks with a higher interest rate. Therefore this makes gold a treasured asset and an essential hedge against inflation.
Gold Price Rally Symbolic of Frail Environment for Risk Appetite
Different from traditional assets such as bonds or stocks that have values derived from coupon payments or dividends, Gold does not provide cash flow to its investors. Long-standing studies of price action, as well as interest rates regarding gold, show that the yearly cost of holding bullion is rough -2.4% a year. For all goals and purposes, the fee of carrying could measure as Gold’s yield. Considering this point of view, there are two reasons forex traders would consider gold. First of all, there is the prospect of a capital increase, that is, more than the -2.4% price of carrying a year. Secondly, when the yield features of other currencies start to look like gold itself. On that note, this is the reason why movements in negative-yielding currencies like the Japanese Yen, resemble movement in Gold prices.When is Gold Price the strongest?
Gold thrives in times of considerable uncertainty, currency debasement and a shifting inflationary environment. However, in history, gold markets have experienced high and low seasonal periods. History has proven that September is the strongest month for gold. Most western jewelers begin to develop their gold inventories throughout this time to get ready for the holiday season. After September January is the next strongest month, which usually gets strong buying amongst Eastern nations before the Lunar New Year. The least favorable months have traditionally been March, April as well as June.Note;
Even though you can trade the Japanese Yen or the Swiss Franc against many other currencies, gold is traded against the US dollar almost all the time. Consequently, trading gold means you must consider the movements of the US Dollar.
Additionally, when learning gold trading, you need to take into account market liquidity. The World Gold Council estimates that average daily gold trading volumes are more than in any currency pairs except EURUSD, GBPUSD, and USDJPY. That makes it more than the daily trading volume in EURJPY for example, so spreads – differences between buying prices and selling prices – are thin which makes gold comparatively inexpensive to trade.
Finally, gold trading hours are almost 24/7. Gold exchanges are nearly always open. Which means liquidity is high around the clock. However like with foreign exchange, it can be quiet after the New York close. Therefore the probability of volatile price movements is high.
Conclusion
Nevertheless, all rules that are used in trading forex are also applicable to trading gold. Retail traders must be cautious not to over-leverage and to consider their risk management, target setting, and stops just in case something goes wrong. After trading sidelong for two straight months, in early-December, Gold was able to recover from the December 2017 low at 1236.37, after previously closing below that each session since July 17. Ever since the December 4 close which was above 1236.37, Gold has not turned back. Gold’s continuous rise is due to many factors, including; the Federal Reserve’s Policy expectations for 2020, the US-China trade war, and energy price changes, among others. However, the common denominator is how Gold fits blends in with other assets regarding risk/return.
Author: Richard Perry
I have been trading forex for a long time for myself.
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