The spot metals traded on forex trading platforms are gold and silver. These two metals play a very important part in the way individuals live and do business.
Gold is a store of value, a medium of exchange and a means of preserving wealth for thousands of years. Gold is more valuable than silver.
Silver has also been used as money in historical times, but its modern use has shifted to the industrial and pharmaceutical sectors. Even though silver is cheaper than gold, it is actually more volatile than gold, with a tick movement being 50 times in value to that of the gold asset on a forex platform.
When it comes to trading, gold and silver sometimes mimic each other’s movements. Gold and silver are sometimes traded as a CFD asset on the forex platforms, in which case they are paired against the US Dollar or against the Euro.
Contract specifications refer to the peculiar features of the asset that affect the way traders trade the asset. The contract specifications for gold and silver on a forex platform are as follows:
a) Market Hours
Gold and silver are commodity instruments which are usually available for trading from Monday to Friday at 10pm GMT to 9pm GMT each day, with a one hour break from 9pm GMT to 10pm GMT. During the break period, no new orders (market or pending) can be set, and any pending orders cannot be adjusted.
b) Duration of Contracts
There are no time limits on contracts for trading gold or silver. Positions can be held open for as long as possible. Indeed, some will argue that gold should actually be traded for the long term, citing the meteoric rise of the price of gold from a price of about $250 an ounce in 1999 to its record high of $1,920 in 2011. Whatever the trading style the trader chooses, one thing is for sure: traders do not have to worry about expiring contracts and rollover of such positions when trading gold or silver.
c) Margin Requirements
Gold and silver are commodity instruments which tend to have large range of movement and large spreads. Therefore, the margin requirement for trading gold is much more than is required for trading forex or stocks on the forex platforms.
d) Trade Conditions
Certain trade conditions will apply to gold and silver on a forex platform. Some of these conditions are as follows:
- Minimum Price Fluctuation: The minimum price by which the price of gold or silver may increase or decrease is 0.01. So the minimum price change to the downside for gold which is priced at $1172.78 would be to $1172.77. In reality, price fluctuations of gold tend to move in multiples of 3-7 pips a tick.
- Spread: Spreads on gold assets are typically very large, and can range from 40 pips to as high as 80pips. Intraday movements are also large and gold has been known to move thousands of pips in a single trading day. The average spread for silver is between 40-50 pips.
- Value of 1 tick value per share: The value of a tick movement in price is generally $0.01. For gold, this translates to a value of $10 per Standard Lot tick movement. For silver, the value of a tick movement is $50 per Standard Lot.
- Minimum contract size: There is a minimum contract size. Unless stated otherwise by the broker, this is pegged at 10 shares per contract.
- Lot Size: The lot sizes for gold and silver are equivalent to 100 ounces and 5,000 ounces respectively.
- Symbol: Gold is usually listed as a pairing with the USD (XAUUSD) or Euro (XAUEUR). Silver is listed as a pairing with the USD (XAGUSD).
Steps to Setting Up a Gold or Silver Trade on a Forex Platform
The prices of gold and silver are subject to influence by fundamental factors. However, the driving force for the price movements of gold and silver are different. Gold is essentially a safe haven asset, which gets a lot of demand when there is uncertainty in global financial markets and traders wish to undertake capital preservation and not capital appreciation. A very clear example of this was seen recently just after the US election. Traders and markets all over the world reacted by selling off the US Dollar and other risk-on assets such as the Aussie Dollar, fearing that a Trump emergence as US President-Elect would unsettle markets with his hardline stance on trade. At this time, traders rushed to buy gold, causing the price to appreciate. When Trump gave his post-election victory speech, it was seen as a soothing balm which settled markets, causing traders to exit gold and go back to the stock markets and US Dollar.
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Gold can be traded on a bi-directional basis (long and short). The sort of market uncertainty described above, triggered by economic and political events, is basically what drives gold prices.
Trade Example: If a trader goes long on gold at a price of 1172.54 with 1 Standard Lot, and price ends at 1173.62, how much has the trader made?
- 1 Standard Lot = $10 per pip
- 62 – 1172.54 = 1.08 points or 108 pips
- The trader would make 108 pips X 10 X 1 = $1080
Silver can also be traded on a bi-directional basis. The fundamentals for silver are slightly different, but price movements still tend to follow those of gold.
Trade Example: If a trader decides to go short on silver at a price of 16.64 with 1 standard lot, and price falls to 16.32, how much would the trader make?
- 1 Standard Lot = $50 per pip
- 64 – 16.32 = 0.32 points or 32 pips
- The trader would make 32 pips X 50 X 1 = $1600