This post covers Gold Trading, its types and factors that affect international gold prices. Types of Gold Trading are also discussed in good detail.
Intro to Gold
Gold is among the oldest medium of exchange known to man. Before paper and plastic money, gold and silver coins were used to purchase items. The role of gold as a “currency” gradually declined but its inherent character as a “store of value” is quite intact.
Historic Value of Gold
Gold was among the leading yardsticks for the overall opulence of nations. Many wars were fought just for the sake of this precious yellow metal. Countries around the world still maintain gold reserves in the event of unforeseen circumstances.
Not too long ago, countries could print paper money strictly according to their national gold reserves. It was later decided that money supply in the economy be delinked from gold reserves. This resulted in rapid proliferation of paper and plastic money that led to many allied problems.
Present role of Gold
Gold has now attained the status of a globally recognized precious metal. Irrespective of its redundancy as a medium of day to day exchange, its importance has grown over time.
Gold as a Commodity
Gold is not merely vital for countries; rather it is also valued by the common man as a genuine and reliable store of value. The same cannot be said about paper money as it keeps losing its intrinsic value owing to many other factors.
Correlation of Gold with Inflation
Inflation is the phenomenon whereby prices of items in any economy start rising. It is an undeniable fact that some inflation is good, rather vital for any economy. It is when inflation heats up the economy to an extent that paper money starts losing its buying power too rapidly.
In order to preserve the intrinsic value of money, people tend to “park” their wealth in alternative avenues. Investment in gold is a historically proven recipe to tackle adverse effects of inflationary pressures.
How Gold Trading Takes Place
Gold is an internationally traded commodity listed at all prominent exchanges. Its value in denoted in US $ and standard unit of measurement is US Troy Ounce. Bulk of gold trade now takes place electronically.
Types of Gold Trading
Gold trading can be broadly categorized into the following 2 types:-
1. Spot Trading:-
Gold is readily bought and sold at prevailing price but this mode entails full payment and physical delivery.
• A buyer opting spot price will pay the entire amount in cash and obtain physical delivery of purchased quantity in a couple days or so.
• A trader who sells gold at spot price must physically possess it at the time of selling as he is mandated to deliver sold quantity of gold to the exchange.
2. Futures Trading:-
Major gold trade takes place in futures contracts. These are standardized contracts with pre-defined date of expiry. Lot size is also uniform at 100 US Troy Ounce. To facilitate small traders, most commodity brokers offer mini lots of gold futures contracts as well.
Future trading of gold does not entail physical delivery at any stage. For this reason, futures contracts are “cash settled”. Upon close of trade, the trader either makes a cash profit or incurs a loss which is reflected in running balance of his futures trading account.
Mechanics of Gold Futures Trading
Traders have varying perceptions about future outlook of gold prices but the 2 most prominent ones are:-
This lot believes that future price of gold would increase. So, they purchase future contracts of gold with the hope of selling those at a higher price.
They believe the current price is not sustainable or overvalued, so they sell contracts in advance with the expectation of a drop in price. If price actually drops, this translates into monetary gain for such traders.
Factors affecting International Gold Prices
Some of the most vital factors that influence gold prices internationally are discussed below:-
• Gold is considered a “safe haven” in times of turmoil whether political or military.
• Uncertainty over the outcome of major international events also fares well for gold prices.
• Military standoffs between key international players also enhance gold demand.
• Whenever interest rates are reduced by key central banks, this makes gold more attractive instead of fixed income avenues.
• Inflation and gold demand have a positive correlation as people rush to buy gold to hedge against imminent loss of value.
• Gold demand sees a noticeable spike when the overall economy is showing signs of slackness.
• When major economic powers are building gold reserves, this exerts noticeable upward pressure on gold prices.
• Prolonged selloffs in equity markets trigger gold demand as people look for cover.
• Declining bond yields also tend to improve overall prospects for shifting to gold.
▪ Gold is an excellent hedge against inflation.
▪ In times of uncertainty, it is prudent to park one’s money in gold.
▪ Future trading in gold with proper risk management presents many lucrative earning opportunities