How To Day Trade Gold

Perhaps the world’s oldest mode of exchange is gold. Whether in coin, bullion or raw form, it has been sought after by civilisations for thousands of years. With a bright and lustrous appearance, gold is visually attractive as well as being exceptionally useful. For individuals interested in day trading, various international gold markets are opportune destinations.

Gold’s utility is a driver of its value. Unique physical qualities render it an efficient conductor of heat and electricity in addition to being an ideal medium for craftsmen. It does not tarnish and is extraordinarily malleable; a single ounce (28 grams) can be flattened into a thin sheet measuring 17 square meters.1)Retrieved 5 November 2017 https://www.britannica.com/science/gold-chemical-element Physical gold is extremely useful in art, dentistry, technology (conductors), medicine and finance.2)Retrieved 5 November 2017 http://geology.com/minerals/gold/uses-of-gold.shtml Its applications in these areas have assured its scarcity and value over the course of human history.

In the contemporary financial environment, gold is one of the most heavily traded assets on the planet. Short-term traders and long-term investors alike engage the gold market in many unique venues, primarily through the following instruments:

As coinage, anchor of fiat currency, or as a portfolio diversification tool, gold plays an integral role in the global monetary system. From its beginnings as specie in the Middle East around 550 BC3)Retrieved 5 November 2017 https://www.gold.org/about-gold/history-of-gold/money-and-gold, to its role in the Bretton Woods Accords, gold is thought of by many as being the backbone of finance.

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London Gold (LOCO)

The London gold market, referred to as LOCO London, accounts for 70% of all global gold derivatives transactions. Estimates for daily volume turnover on LOCO are between a staggering £76-177.9 billion.4)Retrieved 6 November 2017 https://www.gold.org/what-we-do/gold-market-structure/global-gold-market LOCO London conducts trade in an over-the-counter capacity (OTC), which means that precise volumes are kept largely private, leading to a ballpark estimate of exact volumes.

LOCO London is an integral part of the world’s gold trade. With a majority of international OTC gold trading being electronically cleared through London Precious Metal Clearing Limited (LPMCL), LOCO London is a dominate force in the world’s gold markets. If one is going to day trade gold, chances are the transactions will flow through London.

Futures Exchanges

As a rule, day traders target securities that exhibit high degrees of liquidity and periodic volatility. Gold futures markets furnish participants with an abundance of both.

Futures give hedgers and speculators the ability to exchange the rights to various quantities of gold without having to worry about accommodating delivery. With institutions being among the few parties interested in securing the physical asset5)Retrieved 9 November 2017 http://www.cmegroup.com/delivery_reports/MetalsIssuesAndStopsYTDReport.pdf, only a minute portion of all contract holders elect to exercise delivery. The desire for participants to settle in cash ensures high levels of ongoing liquidity until the contract’s expiration date.

Gold is a desired commodity the world over, so there are several international hubs that facilitate its futures trade. Below are the major venues for gold futures products and their average daily market capitalisations6)Retrieved 6 November 2017 https://www.gold.org/what-we-do/gold-market-structure/global-gold-market:

Market Average Daily Market Cap
Commodities Exchange (COMEX) £21.9 Billion
Shanghai Futures Exchange (SHFE) £4.3 Billion
Shanghai Gold Exchange (SGE) £2.9 Billion

For standardised exchange-based futures trading, the Commodities Exchange (COMEX) is the premier venue. Available on the CME Globex digital platform, gold futures adhere to the following contract specifications7)Retrieved 6 November 2017 http://www.cmegroup.com/trading/metals/precious/gold_contract_specifications.html:

Contract Unit 100 Troy Ounces
Symbol GC
Quote U.S. Dollars and Cents per Troy Ounce
Tick Value US$10
Settlement Physical Delivery

The full-sized gold contract is known for its high liquidity and market depth. For individuals that desire a smaller degree of leverage, the CME COMEX offers the E-micro contract8)Retrieved 6 November 2017 http://www.cmegroup.com/trading/metals/precious/e-micro-gold_contractSpecs_futures.html under the following specifications:

Contract Unit 10 Troy Ounces
Symbol MGC
Quote U.S. Dollars and Cents per Troy Ounce
Tick Value US$1
Settlement Physical Delivery

Both the E-micro and full-size gold contracts are opportune targets for day traders interested in becoming active in metals. However, the E-micro product does not have the depth of market or liquidity of the full-size contract. It is true that the leverage and margins are greatly reduced, but for short-term traders, other instruments may prove to be superior options.

CFD Markets

Gold may also traded through the use of a financial instrument known as a contract-for-difference (CFD). CFDs are derivative products valued according to the price change of an underlying asset over a specific period of time. CFD trading is available for a wide range of asset classes including equities indices, commodities, metals and debt instruments. Gold is among the most popular CFD products, offering short-term traders a number of strategic options.

CFDs are traded in a similar fashion to forex currency pairs. Extensive leverage is available, as is robust liquidity and depth of market. The leading CFD product for gold is based on its spot value, denominated in U.S. dollars per troy ounce (XAU/USD). Other CFD offerings for gold are largely broker-specific, but include gold’s value in euros (XAU/EUR), Swiss francs (XAU/CHF) and Japanese yen (XAU/JPY).

Gold CFDs have several advantages over futures, options or equities:

  • No contract expiration
  • High degrees of leverage available (up to 200:1)
  • Low margin requirements
  • Easily convertible to cash

For most day traders interested in gold, CFDs are the preferred choice. However, in various locales such as the United States, the trade of CFD products is not permitted.

ETFs and Gold Stocks

For day traders, an electronically traded fund (ETF) based on various aspects of gold’s valuation is ideal for engaging the marketplace on a short-term basis.

Gold ETFs are professionally managed funds designed to track the value of gold. Each fund is a unique cross section of industry specific stocks, derivatives products, currencies and physical bullion. Below are several frequently targeted by day traders, listed on the New York Stock Exchange (NYSE), available via the NYSE ARCA:

ETF Symbol
SPDR Gold Shares GLD
iShares Gold Trust IAU
ETFS Physical Swiss Gold Shares SGOL
PowerShares DB Gold Fund DGL
Van Eck Merk Gold Trust OUNZ

In addition to ETFs, individual stocks often reflect the volatility of gold pricing. Many investors decide to assume and manage long-term positions through purchasing publicly traded sector-specific companies. Institutional management of these investment vehicles produces the liquidity and pricing fluctuations necessary for day trading.

Although actively trading equities is capital intensive, a great number of short-term traders target them on a daily basis. The stock offerings of companies specialising in mining, refinement and exploration are prime targets for day traders choosing to focus on gold-related equities.

Summary

In terms of asset valuations, gold is viewed as being the global benchmark. It serves as a safe-haven for investors and a premier destination for short-term traders. External determinants of price including politics, central bank activity and supply/demand levels ensure consistent volatility.

Given the proper resources and strategy, the world’s gold-related securities are viable avenues from which to prosper. Futures, CFDs, ETFs and specific stocks all provide day traders with an opportunity to capitalise on any periodic fluctuations in gold’s value.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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