Friday, July 3, 2009

How To Trade Spot Gold?


As we mentioned in “An Introduction to Trading
Spot Gold,” trading spot gold on a forex exchange
is an appealing way to speculate on the price of
gold or to hedge risk.
When you trade spot gold, you take a long or
short position in gold at the same time that you
take the opposite position in the U.S. dollar.
That is similar to forex trading. Forex is simply the simultaneous buying of one currency and selling of another. Forex prices are quoted in pairs. One example of a forex pair is the EUR/USD, which refers to the euro and the U.S. dollar. Another pair is the USD/JPY, which refers to the U.S. dollar and the Japanese yen. With each pair, a trader concurrently buys one currency and sells the other.
Again, when trading spot gold, you simply trade gold and the U.S. dollar instead of two currencies. Not surprisingly, then, reading a spot gold quote is similar to reading a forex quote. It is even represented the same way (XAU/USD). The first symbol listed represents one “troy” ounce of gold. So the price quote—which may look something like 800 XAU/USD—simply means that one ounce of gold is equal to $800 U.S. dollars. (The dollar amount fluctuates, of course.)
Pricing in the spot gold market is similar to pricing in any financial market. There is a price at which participants are willing buy spot gold (called the ask) and a price at which they are willing to sell spot gold (called the bid). The difference is called the spread. Spot-gold trading on forex is a fast-moving market, and the bid and ask change quickly throughout the day.
So, let’s say you receive a quote for spot gold that looks like 800 / 801. This means that you could sell spot gold at $800, or buy at $801.
To show you how trading spot gold works, let’s say you buy a single lot of gold—a lot equaling 10 ounces—at $800 per ounce, so $8,000 total. The spot gold market rallies, and a few hours later you sell the spot gold at $805 per ounce, or $8,050 total. You made $50.
That may not seem like much, but remember, you will likely have many such contracts—because you don’t actually have to pay $800 for each contract. We’ll talk more about that in “The Benefits of Leverage in Spot-Gold Trading.”

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