Gold is a precious metal that has been used in currency trading for hundreds of years. This article will cover everything you need to know about this commodity including the latest news and price trends.
Gold prices are rebounding from three-month lows even as the dollar rises against most rivals. Investors are assessing the impact of recent policy decisions by global central banks on the market.
Gold Prices
Gold prices are determined by trading activity on the futures exchanges. However, the price most commonly referenced in gold news forex is known as the spot price - the current market price for the precious metal on a per-ounce basis. The spot price is determined by a market mechanism that calculates the demand for bullion, which in turn drives supply and thus the spot price. The price of gold is also affected by a number of external factors, including the relative strength or weakness of the US dollar (since the commodity is priced in dollars), economic and financial market volatility, inflation expectations, currency debasement concerns, and flight-to-quality flows (as people invest in gold to preserve their purchasing power). Commitment of Traders reports can help contextualize sentiment around commodities.
Unlike other commodities, the gold market is less driven by traditional supply and demand fundamentals. Instead, gold is viewed more as an alternative currency, often times even referred to as the “monetary metals”. It tends to rise in periods of economic uncertainty, shifting inflationary conditions and when investors lose confidence in other forms of money. As such, gold prices are usually inversely correlated to the US dollar and interest rates.
Because of its unique properties, many forex traders keep an eye on gold prices when trading the foreign exchange market. Changes in the price of gold tend to most strongly affect so-called commodity currencies such as the Australian and Canadian dollars. As a result, it makes sense to follow gold news forex as a proxy for global economic conditions that can influence exchange rates and therefore, forex investments.
As of this writing, the gold spot price is trading at $1985/oz. This level represents a small gain of $0.32 on the day, or 0.1%. The London Metal Exchange publishes daily gold reference prices at 10:30 am, 12:00 midday, and 3:00 pm London time. These times coincide with LBMA gold auctions and the London Stock Exchange's electronic trading system. The LME also publishes daily silver reference prices at the same times. The gold and silver prices are used to determine the LBMA's physical precious metals reference price indexes.
Gold Futures
Gold futures are standardized exchange-traded contracts that allow investors to hedge or speculate on the price of gold without taking physical possession of the commodity. In a gold futures contract the buyer agrees to buy from the seller a specific quantity of gold at a predetermined price on a specified date in the future. Traders can buy or sell gold futures through online trading platforms and full-service brokerage firms that offer the product.
Investors who trade gold futures must meet minimum margin requirements. This amount, which varies depending on market conditions, is required to guarantee that the exchange and the contract clearer will not be left holding the bag should the price of the underlying asset fall drastically. Margin is paid by both the buyer and the seller to an independent central clearinghouse.
In theory the gold futures price should track the spot gold price - but this is not always the case. So long as dollar interest rates are above gold lease rates a futures contract will always be priced above the spot gold price – this is known as ‘contango’. For a futures trade to generate profit the underlying gold must rise at a rate faster than the contango falls to zero, which usually happens at the contract’s expiry date.
While working with futures can be an effective way to invest in gold, it is important to remember that a long position (a buy) obligates the trader to take delivery of physical gold. However, most private traders don’t make or take delivery of the physical commodity as they are able to cancel their positions before the expiry date.
The biggest disadvantage of investing in gold futures is the risk that your investment will be wiped out by sharp price movements. For example, a 10% fall in the price of gold could cost you $5,000 when buying futures if you had to deposit additional funds to cover your losses – while this is unlikely with bullion, it is a real risk and must be considered.
Another downside of gold futures is that you must regularly re-contract your position each quarter when the current period ends. This is known as ‘roll-over’ and can be costly. This process requires you to pay for the right to hold your position and forces you to constantly make decisions about how much money you can afford to spend.
Gold ETFs
As a form of investment, gold ETFs offer investors an alternative to buying physical gold bullion. These ETFs track the price of gold and are considered safe haven investments during times of economic stress. Many people also buy these ETFs to diversify their portfolios and reduce risk. However, before investing in a gold ETF, it's important to know how they work and which are best for your particular circumstances.
The iShares Gold Trust (IAU) is one of the most popular gold ETFs and offers exposure to both physical and monetary gold. This ETF is backed by a total of 1,200 metric tons of physical gold in secure vaults in London. The share price of IAU rises and falls with the underlying gold price. This ETF offers investors a low-cost way to gain exposure to the gold market.
Another popular option for investing in gold is SPDR's sister fund, the SPDR Gold Shares (GLD). This ETF has a similar structure to IAU but with lower fees. It tracks the price of gold in USD, and its shares can be bought and sold just like stocks through online brokers. This is a good option for smaller investors who want to gain exposure to the gold market without having to invest thousands of dollars.
There are other types of gold ETFs, including leveraged funds and exchange-traded notes that don't own the underlying assets but make bets on future prices. While these aren't suitable for beginners, they can provide more sophisticated investors with a means to make short-term bets on gold prices. However, investors should always carefully consider the risks of these products and should stick to the buy-and-hold strategy favored by many retirees.
Investors should also be aware that profits from selling gold ETFs are taxed as collectibles rather than ordinary investments, which can increase their overall tax rate. This is not a problem if investors hold the ETFs in tax-advantaged accounts such as an IRA or 401(k). However, those who sell gold ETFs outside of these types of accounts must pay ordinary income taxes on any gains.
Gold Mining Stocks
Gold mining stocks are an investment in the companies that extract and refine the precious metal. They can offer diversification and potential protection against inflation, although they can be volatile. In addition to a direct correlation with bullion prices, they also can be influenced by political unrest and natural disasters. They can also be affected by energy costs, productivity problems and hedging policies.
Unlike the physical asset of gold, the shares of a mining company have no intrinsic value and are only as valuable as their cash flows. As a result, they often have low returns on invested capital. However, some mining stocks pay a dividend, which can make them attractive to value investors.
Some of the biggest gold miners are well diversified, which can help to smooth out volatility. These include Newmont Mining (NYSE: NEM), one of the largest gold producers in the world, with operations across North America, South America, Africa and Australia. Its most recent deal to acquire Australia’s Newcrest Mining (NYSE: NCM) will give it an even broader foothold in the sector, as well as more exposure to copper.
Another top gold miner is Freeport (NYSE: FCX). This company makes the majority of its revenue from the sale of copper, which has been in high demand from China in recent years. This resilience has helped to cushion its share price during a difficult period for the mining industry.
The gold mining industry is not without its risks, but it can be a rewarding investment for those who are willing to take the time to research and understand the business. The key to success is diversification and finding a strategy that suits your own financial goals. Whether you are looking for a short term trade or a longer-term play, gold news forex can be an invaluable tool to help you find the best opportunities in the market. By keeping up with the latest gold market news, you can stay ahead of the curve and ensure your portfolio is well-positioned for any potential market changes.
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