Popular Precious Metals for traders: Gold
What is Gold?
Gold is a precious metal that is dense, reddish-yellow transition metal that belongs to the Group 11 elements. The Group 11 metals are also known as coinage metals because of their historical use as coins and include silver (Ag), copper (Cu) and Gold (Au). Nowadays, Gold is mainly used in Jewellery, electronics, medicine and as a financial instrument.
Gold is one of the most popular traded precious metals and over 125 times the annual output of actual gold from the world’s mines has been traded in a single year on the London gold exchange alone, the LBMA.
History of Gold
- Gold is thought to have been brought to earth by metal bearing meteor about 4 billion years ago with most of the gold sinking into the earth’s crust.
- Gold was believed to have been first used by humans during the Chalcolithic Period (Bronze Age) and artefacts have been found that are older than the current Christian era by up to four millennia.
- Gold in the form of electrum coins – a combination of gold and silver – was first used as currency in Lydia around 700 B.C. by merchants.
- The use of gold as universal currency, known as the gold specie standard, was first instituted by the British West Indies. This continued until a proclamation by Queen Anne in 1704 made a de facto gold standard with the Spanish gold coin.
Modern day statistics for Gold
The top 10 producers of gold:
|Ranking||Country||Production (metric ton)|
Top 10 Countries with the largest gold reserves:
|Ranking||Country||Gold Reserves (metric ton)|
How is Gold Traded
Due to its popularity as an investment vehicle, gold is traded in a variety of ways. Broadly speaking they can be broken down into two major groups, physical forms and non-physical forms.
The non-physical forms in which gold is traded include:
Derivatives and CFDs
Trading Gold as a CFD is offered by most CFD brokers like London Capital Group. Trading Gold Futures and Spot Gold as a CFD has opened up the door for more traders because it requires less capital than trading a traditional Future. For example:
Minimum Trade Gold Future:
Latest price of a Gold future on the CME exchange was $1,224
Contract size for a single Gold Future contract = 100 troy ounces
Therefore a minimum trade for a single futures contract for Gold would be 100*$1224 = $122,400.
*The maintenance margin required by CME for a Gold futures contract is $5,400.
Minimum Trade of a Gold Future CFD with LCG:
Using the trading conditions offered by London Capital Group, a maximum margin for Gold of 0.5% and a minimum trade size of 0.1 lot (contract size). The minimum cost of a trade of Gold Future using London Capital Group in this example would be $61.20 (10*$1,224/200=$61.20).
Comparison of CFD Gold and Futures gold contracts
Trading conditions for Gold futures with London Capital Group
|London Capital Group Trading Conditions|
|Market||Trading hours||Min spread||Min trade size|
|Gold Futures||23:00-22:00||0.6||0.1 lot|
|Unit risk||Value of 1 pip/lot||Min Margin||Guaranteed Stop change|
*All information collected from https://www.lcg.com/uk/, see website for full terms and conditions. Your capital is at risk. Last updated on February 14, 2017.
100 oz Gold Future Contract example with ICE
|Cocoa Futures: Market Specification|
|DESCRIPTION||CONTRACT SIZE||PRICE QUOTATION|
|100 oz Gold Future||100 fine troy ounces||U.S. dollars and cents per oz.|
|ZG||$0.10 per oz, or $10 per contract||Physical Delivery|
|DAILY PRICE LIMIT||BLOCK TRADES||LAST TRADING DAY|
|N/A||Yes. 5 contract block trade minimum quantity.||Third to last business day of the contract month at 1:30pm New York time.|
|NEW YORK||8:00 PM – 6:00 PM*||7:30 PM|
|LONDON||1:00 AM – 11:00 PM*||12:30 AM|
|SINGAPORE||9:00 AM – 7:00 AM*||8:30 AM|
Market opens at 6:00pm on Sunday, for Monday’s trade date. Pre-open at 5:30pm Sunday, 7:30pm Monday through Thursday
Exchange Traded Products
These are traded on a stock exchange and include Exchange Traded Funds and Exchange Traded Notes.
The first paper currency were gold certificates and they represent a promise by the issuer to provide a stated quantity of gold.
Certificates allow their holders to avoid the stress and risk involved in storing or carrying around a large amount of precious metal.
Gold in physical form can be traded in:
This is the most popular form in which gold is stored and traded, both in reality and pop culture.
These bars are available in various sizes including 12 kilogramme bars (400 troy ounces), 1 kilogramme bars, and less commonly, 1 gramme (31 troy ounces) 1 Tael and 1 Tola bars.
The use of large gold bars, however, carries a significant risk of counterfeiting as larger bars could be made hollow and filled with a variety of less valuable substances.
Also, gold bars can not be weighed and compared to a previously set value to confirm their authenticity, unlike gold coins.
Bullion gold coins differ from numismatic coins which are collected for their rarity rather than any intrinsic value of the gold contained.
The use of gold coins for trading is also very popular with over 50 million ounces of Kruggerands, – a type of gold coin – in circulation around the world http://www.coinweek.com/bullion-report/krugerrand-still-famous-bullion-coin/
Sizes of gold bullion coins vary from one tenth of an ounce to two ounce and examples of popular gold bullion coins include the South African Krugerrand, Australian Gold Nugget, Canadian Gold Maple Leaf and the American Gold Eagle.
What Influences The Gold Market
The monetary policy set out by the Federal Reserve is one of the biggest influencers of Gold. Higher interest rates can lower the demand for gold as holding cash can becomes more attractive and in times of low-interest rates, demand for gold can increase as holding gold over cash becomes more attractive.
Six other factors identified by the FOOL include U.S. economic data, supply and demand, inflation, currency movements, ETFs and uncertainty.
Commodities related to silver include:
Popular Gold changes
London Metal Exchange (LME)
It offers exposure to futures and options of a large variety of metals and commodities
The New York Mercantile Exchange (NYMEX)
It is the world’s largest commodity futures exchange platform, offering a wide variety of products
The Intercontinental Exchange Inc. (ICE)
They operate futures and over the counter contracts through internet marketplaces
Summary: Trading Gold
Trading Gold futures and Spot gold as a CFD is a popular choice for traders who are looking for a low-cost approach to trading. With a combination of leverage and smaller contract sizes, the required capital to trading gold is minimised as a CFD.