Gold is a precious metal that is recognized as an international currency. It is also used in different industries such as textile, jewelry, electronics, medical and optical industries. On the stock market Gold is identified as XAU. The X stands for an international entity with a value that is guaranteed either by a state or a central bank. And AU stands for the chemical symbol of gold, and stems from the Latin word Aurum.
Price of Gold
In order to become more familiar with investing in gold, a look at the historical development of the gold price is helpful. The metal is measured in ounces, representing approximately 31.10 grams. In the Forex market, the gold price is measured as the price per ounce in U.S. dollars.
Since the 17th Century the price of gold is determined on the free market. The price of gold is fixed daily at 15 o’clock in London / England, the time when the U.S. stock exchanges are opening. The price of gold is also affected by market participants, central banks and mining companies which hold large amounts of gold reserves. If banks start selling gold or if gold mining companies increase their production, the price of gold goes down. When central banks buy gold or when the production of gold is reduced, the price of gold goes up. However, banks have only limited opportunities to influence the price of gold, since they own only about 20 percent of the total global gold inventories.
The Gold Standard
Also in the 17th Century a gold depository standard was in place. Paper bills could then be exchanged for gold. For this system, the Bank of England had developed (due to its global dominance in trade and finance) the classical gold standard. One hundred percent coverage by gold in this new system was not provided. Therefore, banks were allowed to give out more money than they really had in stock in the form of gold. The gold standard was the British model to a global system. Each traded currency corresponded to a specific monetary amount of gold. Through this intervention policy the gold price was fixed at 3.17 British pounds for centuries and the exchange rates of currencies were firm and unchanged for a long time.
The classical gold standard resulted in international price stability long into the 19th century. With World War I, the binding of gold to the currency was temporarily lifted. Reinforced by the global economic crisis in 1931, the full convertibility was paused. This allowed traders in the United States to exchange an ounce of gold for five dollars in 1933. Meanwhile, England had lost its preeminence in industry and commerce. With the Second World War, the English financial system broke down, making the United States Dollar the new reserve currency of the world.
Bretton Woods System
With the conference in Bretton Woods in 1944, the U.S. committed to pay for every ounce of gold thirty-five U.S. dollars. Thus the price of gold rose by a factor of seven within eleven years. After President Nixon in 1971 dissolved the agreement on the exchange of 35 dollars for an ounce of gold, the gold price rose to eight hundred fifty dollars in three years until 1980. Within nine years the gold price further evaluated around the 24-fold. This also means that compared to 1971, the gold coverage had fallen significantly to 1:2, and that only half of the outstanding U.S. dollar were covered by the U.S. gold reserves.
Rising Gold Price
By the year 2000, gold was a bull market. And up to 2005 the gold price further increased to the fourteen-fold value, namely $ 500 per ounce. One reason for this was the decline of the U.S. dollar. The other reason for the increase of the value of gold was the increased perceived value of gold due to an uncertain social, political and economic outlook.
Early 2012 the price of USD / XAU was about 1750.00 after the summer of 2011 bounced off at a price of 1921.15. During the year 2012, a further increase over the 2000 USD mark is expected, because in times of global economic crisis, especially emerging countries increase their positions in gold. Furthermore, gold has yet another price potential because it is a resource with limited supply and growing demand in the market.
Trading Gold with a Forex Broker
Meanwhile, many Forex brokers offer in addition to trading currencies also contracts for difference (CFD) and trading with precious metals like gold, silver or oil. With FX brokers, the precious metals are traded exclusively in U.S. dollars. Therefore, traders from outside the U.S. who want to invest in commodities such as gold have also to consider the price development of the U.S. dollar.
Forex traders who use a trading platform such as eToro can trade commodities with no additional software. And trading gold is very similar to trading foreign currencies.
If gold is traded at a Forex broker, the trader can invest into the gold market with a low capital investment (due to margin trading) and at comparably low costs (low spreads). For example, with a leverage of 1:25 traders can benefit from even small price changes. This makes trading gold at a FX broker an attractive opportunity for private investors.
In addition, investing in gold was often a safe and profitable investment in the past. Within the last seventy years the gold price rose steadily, and is therefore unlike paper currencies considered as stable in its value. Therefore, trading gold is especially promising for long-term traders. In the short term, the gold price is subject to strong fluctuations, which is why experienced traders can make big profits in the gold market.
What are the Advantages of Trading Gold with a Forex Broker?
In uncertain economic times, the purchase of precious metals such as gold provides hedging against risks, because gold is not directly affected by inflation. In inflationary times, investing in gold can be profitable.
In addition, traders are required to have only a low capital investment to purchase gold. The trading platforms of various FX brokers, such as eToro offer trading with low margin requirements.
Since gold in general is a safe and valuable asset, the trader strengthens his financial portfolio and the diversification of his investments with the inclusion of gold. And a diversified portfolio means reduced exposure to risks.