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Webtrader: Precious Metals Trading

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Much like trading currency pairs, spot metals enable traders to take a long or short position for example, in gold (XAU/USD) or silver (XAG/USD) while simultaneously taking the opposite position in the US Dollar or other major currencies. Spot Precious metals trading is an over-the-counter market globally. Prices float freely based on supply and demand. The spot price is the price quoted for the metal to be paid - including delivery - two days following the date of the actual transaction (also known as the settlement date).


Spot Precious Metals trade in a similar manner to how currency pairs are traded in the foreign exchange market. Trading is available 24 hours a day from Sunday at 24h00 to Friday at 23h00 (CAT). During the US Winter, trading will be from Monday 01h00 to Friday 24h00 (CAT). Although there is no central market, the main centers for trading Spot Precious Metals are London, New York and Zurich.


Liquidity is typically highest when European market hours overlap with trading in New York - roughly four hours a day during the morning for US traders. There may be some illiquid periods for trading spot Precious Metals around the close of the US market (17h00 to 18h00 ET). The twice-daily gold fix and daily silver fix in London helps set reference points for intraday prices. Settlement happens in much the same way as it would for foreign exchange settlements.


Reasons for trading Spot Precious Metals

 

There are many different reasons that drive investors to trade Spot Precious Metals. Some of these are:


  • Speculation on the price based on the use of fundamental and or technical analysis.
  • Creating a balanced, diversified asset allocation model for an overall investment portfolio.
  • Applying risk management as a hedge against market volatility and financial crises caused by economic, political or social turmoil.

How to read a Spot Precious Metals quote

 

Reading a Spot Precious Metals quote is very similar to reading a FX Spot quote. It is even represented the same way (for example, spot gold traded against the US Dollar is XAU/USD).

Consider the following example:
XAU/USD 1700.00

  • The first symbol listed is one (1) troy ounce of gold.
  • The value of gold is always one (1).
  • The price literally translates to: one (1) ounce of gold is equal to 1700.00 US Dollars.

When the price or quote for gold goes up, it denotes that gold has strengthened in value and is therefore worth more dollars than before. If the price of gold declines, it takes fewer dollars to purchase one (1) ounce of gold and one could therefore conclude that the value of the dollar had increased compared to the value of gold.


Bids, asks and spreads

 

Identically to other markets, Spot Precious Metal quotes consist of two sides, the bid and the ask price:

  • The BID is the price at which you can SELL.
  • The ASK is the price at which you can BUY.

The difference between the bid price and ask price is called the spread.

 

Spot Gold and Silver prices are quoted internationally in US Dollars per troy ounce.

In the following example, a quote of XAU/USD 1700.25 means that 1 oz gold is equal to US$1700.25. If you buy a single lot of gold (one (1) lot = 10 oz) at this price and sell it at a higher price, your profit would be the difference between these two prices. Bearing this in mind, trading Spot Precious Metals on Webtrader is similar to trading currencies.


A typical quote you might receive for spot gold is 1700.25/75. In this scenario, you could sell one (1) or more lot(s) of gold at 1700.25, or buy at 1700.75.

The spread you would pay in this example would be the difference between these two prices (900.75-900.25) or 0.50. The dollar amount represented by the change in price would depend upon the size of the trade you have placed.


Pips or points: what's the difference?

 

Like forex prices, spot gold prices are quoted in tiny increments called pips ("percentage in points"). Located at the second decimal place for a spot gold quote, or 0.01, each pip represents one (1) cent in dollar value.


Market drivers

 

The following factors and conditions may influence the price of metals:

 

  • As a hedge against inflation

Investing in gold and silver is often seen as a hedge against inflation. The thinking behind this is that when buying power decreases, thereby affecting the price of currencies, owning gold will hedge against your wealth decreasing. Doing so ensures that you will receive a commensurate amount of currency for the amount of gold you own, no matter what the inflation rate is.

 

  • As an alternative to the US Dollar

Gold and silver is also used as a hedge against the US Dollar in times of economic turbulence. Thus when the reserve currency comes under pressure, investors tend to seek out alternatives.

 

  • A 'safe-haven' investment

Another view of gold is as a "safe-haven" investment. During times of high volatility and risk, investors may move funds to gold as a way to safeguard against uncertainty.

 

  • Understanding economic and political factors

Indicators that impact inflation such as the consumer and producer price indices, interest rate announcements, and treasury auctions play a large part in determining the inflation rate, and therefore have an impact on gold prices. Macroeconomic indicators, such as the Unemployment Rate and Gross Domestic Product (GDP) also shed light on the strength of an economy, and may lead investors to lean towards or away from spending money on gold.

In the past, there has been a strong negative correlation between precious metals and the US Dollar. In the current economic environment this correlation has weakened, however we should keep in mind that it could resurface at any time.

Political events can also significantly impact the price of gold. If uncertainty arises over conflict in the Middle East, this might have an effect on the perceived safety of an investment in a country's bonds or currency, and to hedge against this risk, investors might move funds into gold or cash. Oil and other commodity prices may also be affected, which could carry over into the gold markets, pulling or pushing the price of gold in the same direction as oil.

Typically the spot gold market is somewhat volatile, given the ability to enter and exit trades several times a minute. For this reason, prices may be more susceptible to short-term fluctuations that do not necessarily follow a long-term trend.


Leverage and Margin

 

  • Leverage in Spot Precious Metals

Leverage for Spot Precious Metals trading varies according to the type of metal you are trading in – refer to our list of prices for full detail. If the leverage for gold is for example 100:1, for every USD 1 you have in your account balance, you have USD 100 worth of buying and selling power to trade gold. As a result, leverage increases a client's buying and selling power and enables them to participate in a market that may otherwise be cost prohibitive. Do keep in mind though that increasing leverage leads to increased risk.

 

  • Margin in Spot Precious Metals

Margin is the amount of money you must have in your account to hold a particular trade. At 100:1 leverage, your margin factor is 0.01 (1%). This means that you are required to have a minimum cash balance of 1% of the total value of the positions you hold in your account at any one time. If you fall below this amount, your trade may be closed automatically, also referred to as being liquidated.

 

Take a look at an example:

If you wanted to place a trade of one (1) lot (10 troy oz) of spot gold, and buy it at US$1720.55, the amount of margin you would be required to maintain would be 1% of your trade size.

 

Therefore, 10 (oz) multiplied by the price (US$1,720.55) and the margin factor (0.01) would give you US$172.055.
10 x US$1720.55 = US$17,205.50
US$17,205.50 x .01 = US$172.055


This would be the margin requirement for a single lot of spot gold bought at the above price. If your account balance were to fall below this level, your trade would be automatically closed. Another way to look at this example is to say that 100:1 leverage gives you the ability to trade 10 ounces of gold at US$17205.50, with US$172.055


How to calculate profit and loss

 

Consider the following examples:
Profit and loss calculations for Spot Precious Metals are fairly simple. The smallest increment of a spot gold price is 0.01. For spot silver, it is .001. The smallest trade you can place in spot gold or silver is a single lot. For gold that is 10 troy ounces, and for silver it is 500 troy ounces.

At this level, each pip is worth US$0.10 for gold and US$5 for silver. For example, a change in price from 1720.50 to 1720.80 in gold means a difference of 0.30, or 30 pips.

If you are trading one (1) lot, and each pip is worth 10 cents, then the profit or loss from this trade would be US$3.00. If you decide to trade more than one lot, the value of each pip is simply multiplied by the number of lots you are trading.

 

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‎12-07-2017 09:57 AM
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