Discover the benefits and secrets of trading gold
Trading gold with a forex broker
In truth, most investors in gold actually prefer to buy and hold their bullion in a safety deposit box but, as always, logistics can be cost-and therefore this approach may not always be favorable.
Thankfully, there is an alternative method for investing in gold and that is through trading spot prices. This way, instead of physically buying and worrying about transport and storage, you merely speculate on gold’s current exchange rates compared to the USD.
Keep in mind that gold is measured in ounces while trading takes place in lots. To put it in simple terms, most brokerages will count 1 trading lot as 100 ounces of gold, but you can trade smaller lot sizes as well – including 0.1 or 0.01 lots or 10 and 1 gold ounces respectively. However, you should note that position sizing affects your profit and risk exposure in the market. Larger positions or larger lots translate to higher risk exposure but also increase your profit potential.
We’ll walk you through an actual gold trade or an XAU/USD trade as it’s quoted on the trading platform – with XAU being the symbol for gold and USD referring to the US dollar.
Gold trading example: buying XAU/USD
Let’s say, for example, you have an account with $10,000 balance and you want to place a trade of 1 lot or 100 gold ounces because you believe the gold price will go up. Your broker also provides you with 100:1 leverage ratio of buying power so you can control larger positions with a less initial capital.
On the trading platform you get a quote for XAU/USD = 1415/1420, where 1420 is the Ask price or the price you need to pay in order to enter a long or buy position. If you wanted to short or sell 1 lot instead, you would be selling at the Bid price which is 1415.
Going back to our trade, you would need at least $1,420 available margin in your account to trade 1 lot in this case or $140 for a smaller 0.1 lot.
The remaining $8,580 ($10,000 – $1,420) would be your free margin which may be used as risk protection in case the price moves against you or for any other positions you may want to open.
Since every tick or pip move in the gold price is equivalent to $0.01, in order to blow out your account, the gold price would need to move by $85 per ounce against your position. However, in reality, there are protections in place to prevent this from happening as the trade would be closed out by your broker with a margin call as soon as the price moved at 20% of the $1,420 you risked for this trade or at $284.
Regarding the potential profit in this case scenario, if the rate of gold rises by $1 and you close the trade at the price of $1421, you would have gained 100 pips for each lot traded. 100 pips x 100 ounces = 10000 pips total profit. Now, to convert our pip profit into dollars we multiply the 10000 pips by the gold pip value of $0.01. Which is approximately $100. Please note that the pip value may vary between different assets.
So, if you had opened the trade with 2 lots, you would have realized a $200 return for each dollar increase in the gold price. If the price jumped from $1420 to $1430 and you traded 2 lots, you would have made $2000 in a few minutes.
As we mentioned previously, however, it’s important to take risk management into consideration and as such, a more conservative trader with a 0.5 lot would still be rewarded with a noteworthy profit for this trade while bearing much less risk. 0.5 lot = 50 ounces. 50 ounces x 100 pips = 5000. This amounts to $50 dollars in profit for each $1 increase in the gold price.
If you want to keep your risk exposure as low as possible when trading, you need to consider your position size as well as the leverage you will be applying.
What moves the gold prices?
The fundamental factors that affect gold prices are as follows:
- Supply and demand
- Monetary policies set by the Federal Reserve
- Economic data (GDP growth, NFP)
- Strength of the US dollar
As is the case with all financial instruments, the price of gold is heavily impacted by the supply and demand in the market. The amount of gold that is mined is also a big factor here as production can also be quite volatile at times and key economic indicators like GDP variances and the number of available jobs can drive the price up or down accordingly.
Gold traders will also benefit from keeping a close look at the US dollar since gold prices are inversely correlated to its price. Simply put, when the US dollar is weakening, investors rush to diversify their money in gold since it’s considered the more stable investment.