Gold is traded in a variety of ways, with the most basic being buying physical gold. However, tremendous technological advancement has led to alternative ways of trading gold.
Unlike opening an electronic gold trading position, buying physical gold is usually more expensive largely due to manufacturing costs, storage costs and costs associated with converting physical gold to cash.[1]
Price in percentage (pip), is the minimum change in a currency pair’s price. In most quotes this is the fourth number after a decimal. Therefore, 1 pip translates to a price movement of 0.0001. Most forex brokers offer a $0.01 gold pip which means that traders either lose or gain 0.01 for every pip the gold price moves. This basically means that 1 dollar is equal to 100 pips.
Trading the financial markets can be daunting, especially for new traders. However, you can use forex, commodity and equity index signals available on various platforms without doing the in-depth analysis yourself.
Trading gold electronically can be done in various ways, such as trading future contracts on gold, gold ETFs (exchange traded funds) and gold contracts for difference (CFDs).
When trading gold via CFDs, buying or selling gold entails participating in the gold market without owning it physically. It’s just like trading currency pairs with the only difference being that traders buy or sell gold against the USD.
The gold CFD is represented by XAU/USD. USD is the dollar component and the XAU the gold component. When the gold price is projected to fall, traders can sell this pair and buy it when prices are projected to rise.
If you purchased one ounce of gold, a 100 pip movement will make a difference of $1 in your gold trading account. You can calculate your potential profit by simply multiplying the distance to your target by your trade size.
For instance, if you buy 20 ounces of gold at $1,250 with a take profit of $1,251.12, it simply means that you’ve targeted a gain of 112 pips. Therefore, this should be multiplied by the number of ounces: 112 pips x 20 ounces = 2,240 pips. This can be converted to dollars by simply multiplying the number of pips by the cost of $0.01. Therefore, 2,240 pips x $0.01 = $22.40. This is the profit on 20 ounces if a profit target of 112 pips ($1.12) is attained.
It is essential to keep in mind that there’s a huge difference between a pip in forex and a gold trading pip. The pip value on the EUR/USD is $0.01, which is ten times the value of a gold pip. This means that a 100 pip move in the value of gold can be compared to a 10 pip move in the EUR/USD.
There are numerous economic factors that impact gold prices, including gold demand and supply, the value of the USD, inflation, interest rates, and large central bank transactions.
Economic events that impact gold prices abruptly are usually events that cause significant moves in the dollar. When the trading price of gold increases, the dollar usually decreases, and vice versa.[2]
Some economic indicators also tend to impact the gold trading price. For example, if China were to release economic statistics which show a huge decrease in the overall demand for production raw materials, gold trading prices could make a significant move lower.
Although factors that determine the price of gold CFDs may differ from those that impact typical forex currencies, most of the rules for assessing forex currencies apply.
Reference
Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.
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