gold trading basics

How do you trade gold profitably?

Gold, long considered a universal currency, can be traded on a variety of exchanges around the world. In this article, we’ll cover how to trade gold on a Forex platform.

What Is a Currency Pair?

A currency pair compares and provides information regarding how much one currency is valued against another. For example, consider EUR/USD: EUR (the euro) is the base currency and USD (US dollar) is the quote currency. It tells you how many USD you need to purchase one EUR.

Gold/Currency Pairs

Just as you can trade one currency against one another, you can trade precious metals against currencies. Trading metals on FX platforms is sometimes referred to as “trading metal currency pairs” or “trading spot.”

The spot price of gold is the cost of one ounce of gold in a select currency.

Just as with fiat currency pairs, when you trade a gold currency pair, you are simultaneously buying and selling in the transaction.

For example:

  • You would buy XAU/USD if you believed the price of gold was going to rise against the US dollar.
  • You would sell XAU/USD if you believed the price of gold was going to decline against the dollar.

Most Forex platforms that provide metals trading offer XAU/USD. But many offer other pairs, such as:

  • XAU/AUD
  • XAU/EUR
  • XAU/SGD
  • XAU/HKD

Some platforms also allow you to trade gold against silver: XAU/XAG.

Why Gold?

Gold has played a role as a safe haven and currency for millennia: it’s a store of value, it’s fungible, divisible, and unlike fiat currencies, you can’t easily create more of it.

It’s virtually indestructible and the supply remains relatively stable. (But note that established currencies like the US dollar have been far more stable than gold over the last few decades).

Gold is also less subject to fluctuations in the business cycle and in industrial demand, than other metals such as platinum.

There are a variety of reasons you might be interested in gold, but the following are the most common:

  1. You want to hedge against inflation or economic instability on a global scale
  2. You want to speculate on growth in demand
  3. You want to diversify your investment portfolio

How to Trade in Gold/Currency Pairs

Today, you can trade gold almost like you would trade any foreign currency. You purchase gold pairs in the currency you think that it will increase in value against. And you sell those pairs when you think gold will fall. It’s easy — in theory!

That said, the principles of trading are slightly different due to the natural differences between precious metals and currencies (though there are significant overlaps).

Consider Market Performance

Gold Performance

The first thing (and one of the simplest) you should consider is whether you expect a bearish (the market will underperform) or bullish (the market will improve) market.

If you think the market will be bearish, then the price of gold is likely to rise as investors attempt to mitigate losses by transferring their assets into a more stable store of value.

If, however, you think that the market will be bullish, the price of gold will likely go down as other assets increase in appeal to investors.

Consider the Value of the US Dollar

Most gold is traded against the US dollar. That means that you will need to consider the performance of the US dollar (USD) when trading in gold, especially if you are beginning the transaction process with a currency other than the US dollar.

Consider Your Timing

Gold exchanges are open almost 24/7, which means that liquidity is high no matter what time of day you’re executing your trade. That said, there are certain times (specifically when exchanges in New York close) where the markets are quieter and you’ll see greater volatility in prices and price movements. Keep this in mind when timing and executing your trades.

Derivatives and Underlying Assets

Before trading metals make sure you’re clear on what type of contract you are trading.

With many contract types — such as CFDs (not available in the U.S.) and binary options — you are not taking ownership of the underlying asset. These types of contracts offer derivatives of the underlying asset; you are trading on price movements.

The good news is trading gold derivatives is far more affordable than purchasing the equivalent in physical bullion.

Many platforms also offer leveraged trading with derivatives.

Leverage and Platforms

In the wake of the 2008 “Great Recession,” the Dodd-Frank bill of 2011 prohibited leveraged trading of metal currency pairs in the U.S.

However, in select other countries you can still trade metal currency pairs with leverage.

  • Many FX platforms offer metals trading.
  • Outside of the US, you can trade metals via CFDs (check your regional laws to ensure CFDs are legal in your country of residence).
  • Those looking to trade metals, but not against a variety of currencies and not at the full cost of futures, may want to explore Nadex’s binary options on gold and silver. (Nadex is regulated in the US by the CFTC.)

Conclusion

Trading gold is similar to trading currencies, though there are some slight differences. In the end, the basics of trading gold to maximize your return include considering the state of the market, the value of the dollar, and the timing of your trades.

Successful trading takes discipline, knowledge and hard work. Trading gold is no different.


Katie Horne is a U.S.-based `software engineer and technical writer.

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