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Intro to spot metals trading


Trading spot metals with FOREXonline1.com allows you to speculate on the price movements of gold (XAU/USD) or silver (XAG/USD) relative to the US dollar or other major currencies.


Our spot metals markets are quoted and traded in a very similar way to currency pairs. Trading is available 24 hours a day from Sunday 11pm GMT through to 10pm Friday GMT.


The 'spot' price refers to the price quoted for the metal to be paid for (including delivery) two days following the date of the transaction (the settlement date).


Spot gold and silver trades globally over the counter with the main centres for trading in London, New York, and Zurich. Liquidity in the spot metals market is typically highest when European market hours overlap with trading in New York, and the market can experience periods of illiquidity around the close of the US market.


Who trades spot gold and silver, and why?


There are many different reasons that drive investors to trade spot gold and silver:


    * Speculation on price movements in a very liquid market, often using fundamental and/or technical analysis to identify potential opportunities

    * Part of a balanced, diversified asset allocation model for an overall investment portfolio

    * As a risk management tool, used as a hedge against market volatility caused by economic, political or social turmoil.


How to read a spot metal quote


Reading a spot gold or silver quote is very similar to reading a Forex quote. Quotes for spot metals are represented in the same way as quotes for currency pairs. For example, spot gold traded against the US dollar is XAU/USD.


Spot metal prices are quoted internationally in US dollars per troy ounce, so for a quote of XAU / USD 900.25, 1oz of gold is equal to $900.25


When the quote for gold goes up, this means that gold has strengthened in value and is now worth more dollars than before.


Conversely, when the quote for gold goes down, this means that the value of gold has weakened compared to the dollar, and it is therefore worth fewer dollars than before.

Bids, asks and the spread


Just like other markets, spot gold and silver quotes consist of the BID and the ASK:


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 and ask prices is called the spread, and represents the cost of trading.

Trading spot metals


Spot metals are quoted internationally in US dollars per troy ounce, and trading takes place in ?lots?. A single lot of gold is 10oz. A single lot of silver is 500oz.


A typical quote you might receive for spot gold is 900.25/75. This means that you could sell at 900.25, or buy at 900.75. The spread is the difference between these two prices (900.75-900.25) or 0.50, and represents the cost of trading.


The smallest amount that you can trade  is 1 lot,(10 troy oz). At 1 lot, the smallest price change possible (0.01) is equivalent to $0.10.


As an example:


You decide to buy 1 lot of XAU/USD (spot gold) at 900.25.


A few minutes later, the bid (or sell) price has risen to 900.95, and you decide to exit your trade.


Calculating your profit:


You bought 1 lot at 900.25


You sold 1 lot at 900.95 a difference of 0.70, or 70 pips


I lot = 10 oz, and the price quoted is always for 1 oz


Your trade has therefore made 70 pips x$0.10, equal to $7.00.


If the price had moved against you to 899.60, your loss would be calculated as follows:


You bought1 lot at 900.25


You sold 1 lot at 899.60, a difference of 65 pips.


Your trade has therefore made 65 pips x $0.10 per pip, equals to $6.50.


Pips or points


Like forex prices, spot gold prices are quoted in very small increments called pips or "percentage in point". A pip refers to the second decimal place for a spot gold quote, or 0.01.


Each pip represents 1 cent in dollar value.


When calculating the value of your trade, remember that spot metals trade in lots. For spot gold, a lot is 10oz, which means that a one pip (1 cent) movement in the gold price represents a $0.10 dollar price movement for each lot that you are trading.

Pips or points, what's the difference?


Like Forex prices, spot metals prices are quoted in very small increments called pips or "percentage in point". A pip refers to the second decimal place for a spot metals quote, or 0.01.


Each pip represents 1 cent in dollar value.


When calculating the value of your trade, remember that spot metals trade in lots. For spot gold, a lot is 10oz, which means that a one pip (1 cent) movement in the gold price represents a $0.10 dollar price movement for each lot that you are trading.


The following factors may influence the price of metals:

Hedge against inflation


One of the most common description of gold and silver as an investment is as a hedge against inflation. The thinking is that as the inevitable decrease in buying power affects currencies, owning gold is one way to hedge against the value of 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.

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 moving money into gold.


Political events can also have a significant impact on 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, and the commodity relationship might have a carry-over effect 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.


How leverage for spot metals works+


Leverage trading, or trading on margin, means that you are not required to put up the full value of a position. As a result you can open a significantly larger position than you would be able to if you needed to fund your trade in full. Trading on leverage increases the potential for profit, and allows traders to participate in markets that would otherwise be cost prohibitive, but also increases the risks, and so the potential for losses.


Leverage for spot gold and silver trading is set at 100:1. This means that for every $1 you have in your account balance, you can trade $100 worth of a position.

Margin


Margin is the amount of money you must have in your account to open and maintain a position.. At 100:1 leverage, your margin factor is 0.01 (1%), which 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.


As an example:


The current gold price is quoted as XAU/USD $920.55


You buy 1 lot (10 oz) of gold at $920.55.


Your margin requirement is 1% of your trade size, and is calculated as follows:


Trade size x price x margin factor


10 (oz) x $920.55 x 0.01 = $92.06.


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 920.55, with $92.06.


Calculating profit and loss


Profit and loss calculations for spot gold and silver are fairly simple.


Both gold and silver trade in lots, and the smallest trade you can place is 1 lot.


For gold, 1 lot is 10 troy ounces, and the smallest price increment (pip) is 0.01. This means that a one pip movement in the gold price represents a $0.10 price movement for each lot that you are trading. (1 cent x 10oz)


For silver, 1 lot is 500 troy ounces, and the smallest price increment (pip) is 0.001. This means that a one pip movement in the silver price represents a $5 price movement for each lot that you are trading. (1 cent x 500 oz)



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