Spread Betting The Gold Market
Spread Betting The Gold Market
Spread Betting The Gold Market
Gold is one of the most frequently traded commodities markets for customers of financial spread betting companies. For hundreds of years this precious metal has been the investment of choice at times of uncertainty, a substitute way of keeping money, one that will not see value eroded away by inflation. A testament to its popularity with investors is that in the 1990s gold traded at $250 a troy ounce: today the price is about five times as much!
Most spread betting and CFD trading companies will be able to quote a spread on the gold price. While it is possible to buy physical gold from bullion dealers, with financial spread betting you can simply trade the price at no time do you have ownership of real gold, with the costs associated with storing that. When spread betting the gold price you are not trying to preserve the value of your assets, you are simply trying to predict which way the gold price will go.
To assess what the gold price might do next, it helps to look at supply and demand. For most metals markets this would mean looking at how much of the metal is mined each year compared to how much is bought. In the case of gold, the mined ore is usually turned into jewellery and gold bars. But this equation is complicated for gold by the fact that it is increasingly becoming a favourite form of investment for pension funds and speculators, and as central banks look to hold some portion of their reserves in the form of gold, the pressure on the price has become unprecedented.
The biggest gold producer is South Africa, with mines that can go five kilometres into the ground and take almost a full day to travel through. China, Australia, the US, Peru and Russia are also big producers. The level of how much gold is mined globally tends to grow slightly every year, but in the short term production can get disrupted by strikes, accidents or problems with electricity supplies. These short term spikes in the gold price can be exploited by opening a spread betting account, because financial spread betting companies can lend you money (called trading on margin) to help you increase the size of your trade.
If, for example, you were quoted a margin rate of 1.5% on the gold spot price, that means you would only need, at minimum, to commit 1.5% of the total value of your trade. At 100 margin, your trade would be equal to 6,666. With financial spread betting, you would be able to pocket the profit a successful trade of that size would make you (after all, a 2% move in the price of gold when you have over 6000 in the market is much more than if you had only 100). The downside, of course, is that you are also responsible for the total losses, which could exceed your initial deposit.
On the demand side nowhere is gold as beloved as in India, Pakistan and the Middle East, where festivals and big family occasions are marked with lavish gifts of gold jewellery. China is rising in importance as a key gold buyer, again because of retail interest.
When it comes to central bank holdings, there has been a complete U-turn in the way central banks view gold. The trend in the 1990s was to sell gold reserves the Bank of England famously sold some of its gold holdings when prices were at their lowest but this has changed completely since the credit crunch and now central banks, particularly those in emerging economies, are buying into gold to have at least some portion of their reserves stable, unlike the part that is in currencies such as the dollar, yen or the euro, and which can wildly swing in value.
Speculative investment is becoming an increasingly large part of gold buying and has the capacity to override the effect on the gold price from simple supply and demand for the physical metal. Over the last few years pension funds have increased the amounts of gold they hold in their portfolio as a way of dampening the effect of drops in share and bond prices and this trend is only likely to continue. Gold ETFs have become a massive source of demand for the metal, almost rivaling demand for gold bars.It is now also possible to spread bet on the price of gold ETFs as well as the price of gold futures and spot gold.
Gold futures are traded on Nymex in New York while London is the main trading arena for over-the-counter trading. Here thedaily price for gold is fixed twice a day by a group of banks that are market makers in the precious metal.
A good source of information about gold flows is the World Gold Council, an association of gold producers, and GFMS, a leading London consultancy providing annual statistics for the gold market.This can help you get a feel for the large scale activity in the gold market that will be driving the price on your trading screen.
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