Gold and silver have been chosen by traders for hundreds of years now. These metals are always in demand, especially from manufacturers of jewellery or other sectors such as the electronics or medical sectors. A metal trader can usually trade gold or silver as bullion or coin. Some traders prefer to hold physical metals to hedge against inflation or to diversify their trading portfolio. However, this way of precious metals trading is rather complicated. That’s why the most common way among traders is to trade CFDs on gold and silver. This means that they can speculate on the price of gold and silver rising or falling using a derivative (CFDs), without actually owning the asset.
What are CFDs?
A CFD refers to a contract between a trader and a broker. CFD traders speculate on the price movements of gold or silver. For example, with gold trading online, those traders that believe that the price of gold will move upwards will buy the CFD. In the opposite scenario, they will sell an open position.
By the end of the contract, the two parties involved should exchange the difference between the price of the asset at the time the contract started and the price of the asset at the end. The net difference between the two prices is settled through the trader’s trading account.
How CFDs trading on gold and silver works
To better understand how CFD trading works, traders could try opening a demo account with a broker so as to put their skills to the test within a risk-free environment. Opening a trading account with a broker also means that traders will have access to various educational materials and trading tools as well as to the latest market research and analysis. You can then:
- Choose from a wide spectrum of trading instruments
- Buy or sell through order tickets
- Apply risk management strategies
All these come without risking any losses. Trading on a demo account is perhaps the easiest way to familiarise yourself with how the market works as well as with the factors that drive the market.
Advantages of trading on CFDs
As already mentioned above, numerous silver traders or gold traders, trade gold and silver as commodities through CFDs. The main reason behind this is that they can trade with leverage, meaning that they can trade larger positions while having a rather small initial deposit so as to potentially increase their revenue. However, there are always risks involved.
Similar to options and futures, CFDs are another derivative used to speculate on commodities prices. For instance, let’s assume that a trader opens a long CFD position on gold when its price was £1,500 and closed the position when the price reached £1,600. The price difference of £100 would then be the trader’s profit.
When traders trade CFDs on gold and silver they also need to bear in mind the costs of trading.
Factors affecting the price of gold and silver
There are numerous factors that drive the price of gold and silver. Read below to find out some ways in which the metals market is affected.
To start with, supply and demand drive the prices of all commodities. A lack of precious metals or a rise in the demand for them is what makes the metals more valuable. If, for example, there is an interruption in a big silver-producing region by political issues, then the price of silver may increase in the short term. A possible new extraction technique though could bring the opposite result. Taking another example, if there is an increased demand for metals like gold in sectors such as electronics, this could also move prices upwards.
Gold is considered a popular metal in the precious metals market. As expected, therefore, its prices are connected to other markets, such as the silver market. It is more likely that silver or platinum respond to changes in gold prices rather than the other way round. However, there are additional factors that affect the price of gold and silver such as:
- Economic uncertainty. Since the two precious metals, gold and silver, are considered as safe havens, there might be an increase in their prices during periods of economic uncertainty or political instability. Likewise, in times of high inflation or recessions, there might also be a rise in the price.
- Strength of the USD. Gold is denominated in US dollars. This means that when the USD decreases, then the price of gold goes up. The dollar is a rival safe-haven asset to gold.
- Quantitative easing. During times of inflation, more and more traders might be attracted to gold and silver. Quantitative easing also referred to as money printing, weakens the currency’s value. Metals are used by traders as a hedging mechanism against inflation.
- Industrial output. As already discussed earlier in this article, there are many industrial usages of gold and silver. The manufacture of automotive parts, medical devices, jewellery or electronics construction are some of these usages. Also, more and more new applications are constantly being developed. The more the demand for these goods grows, the more the demand for precious metals will be as well.
Benefits of trading gold and silver with IronFX
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