How to Trade Spot Gold and Silver

Many FX platforms offer gold and silver trading along with currency pairs. This type of trading is based on the spot price (i.e., current price) of silver or gold. So it’s often referred to as “trading spot gold” or “trading spot silver.”

Let’s find out what’s entailed in this type of trading.

Understanding the Basics of Trading Metals

Trading spot gold or silver is also referred to as trading “metal currency pairs.”

To understand how trading metals works on FX platforms, let’s look at what basic currency pairs are.

  • A currency pair symbol refers to the exchange rate of one currency in another. For example: EUR/USD.
  • You can think of symbols like EUR/USD as being similar to stock ticker symbols. Just like stock ticker symbols, currency pair symbols are associated with a specific price that continually fluctuates.
  • This currency pair represents how much of the quote currency, USD (US dollars), you need to purchase one unit of the base currency, EUR (euro). For example, at the time of this writing, the exchange rate for EUR/USD is: 1.2361.
  • When you trade currency pairs you are speculating on the price movement of the exchange rate between two currencies.
  • FX platforms treat gold and silver as currencies too. And just like fiat currency pairs, you can trade “metal currency pairs.” Instead of comparing two currencies, a metal currency pair depicts the exchange rate between gold or silver and a government currency.

For example, XAG/USD represents how many US dollars you need to purchase one unit (one troy ounce) of silver (XAG). That exchange rate is currently 17.986.

XAG/USD is also referred to as the spot price of silver in USD.

When trading XAG/USD you would:

  • Buy XAG/USD if you thought that the price of silver would rise against the USD after you enter the trade.
  • Sell XAG/USD if you thought that the price of silver would decline against the USD after you enter the trade.

Most commonly, FX platforms allow you to trade gold (XAU) or silver (XAG). Some brokers may offer options for trading spot platinum (XPT) and spot palladium (XPD).

Other Types of Metals Trading

Many retail brokers offer a variety of contract types, like CFDs (contracts-for-difference) or gold or silver.

If you are trading anything other than spot metal, make sure you understand what the underlying asset is. For example, there are CFDs based on gold or silver futures contracts.

In these cases, you are speculating on the price movement of the underlying asset, you won’t actually own the futures contract. And futures contracts for precious metals will have a different price than spot metal.

Additionally, if the underlying asset is actually a silver or gold futures contract, you’ll need to make sure you know which month the futures contract is dated for. Different contracts from various months will have different prices.

You need to know this in order to make sure you’re following the correct price charts!

What Factors Drive Silver and Gold Prices?

image of a man that represents the idea of how to trade spot gold and silver electronically

In order to trade precious metals successfully, you need to understand their uses as a store of value and as industrial inputs. A good place to start is to begin reading articles about gold and silver. The more you know about a commodity, the better prepared you will be to trade.

Many investors view gold as a safe haven in times of market turmoil and recessions. When hedging against volatility, some will seek out gold to help mitigate some of the fluctuations in their overall portfolio.

Gold has been traditionally viewed as a safe place to park your cash in order to preserve your purchasing power. In this view, gold serves as a hedge against inflation that occurs with currency devaluation.

This is one reason for the increased interest in gold during the coronavirus pandemic: some hedge fund founders expect the trillions in stimulus spending to devalue the currency and eventually cause severe inflation.

This fact drives a lot of the price changes not just of gold but also silver because both are all seen as tangible, money-like stores of value. But for every view like this there are countering views.

For example, some argue that hedge fund managers pursued a similar strategy of chasing gold in the wake of the 2008 recession, yet the expected inflation never occurred.

Gold and silver prices are also driven by industrial demand.

Silver is widely used in industry in applications such as electronics, solar power, and medicine as well as in jewelry. Platinum has many similar applications but is especially used as a catalyst in chemical production.

And palladium is primarily used as a catalyst — particularly in the auto industry in catalytic converters.

A second wave of the coronavirus could lead to new lockdowns of mines, which could increase prices.

Learn Technical Analysis

image of a mother, teaching her son how to trade spot gold and silver in the kitchen

In addition to following the news on issues like supply and demand, traders should learn the basics of technical analysis.

Thanks to today’s streamlined trading platforms, you can add a technical indicator to a chart with a click of a button.

Popular indicators may be grouped according to their function.

Don’t rely on just one indicator though. Some tools, like Bollinger Bands, while valuable, are known to give “head fakes.” These are false signals that seem to indicate a price is going to move in one direction, yet the price takes off in the opposite direction.

You could use Bollinger Bands to track momentum and detect imminent price breakouts, and also use the Parabolic SAR indicator to confirm that price direction.

Ways to Trade Gold and Silver

Historically, you had to buy and sell precious metals in the form of coins or bullion to trade them. This is no longer the case. Now people can buy futures and options, as well as gold exchange-traded funds (ETFs) that made gold trading similar to stock trading.

Today, things are even simpler. Most forex brokers make it as easy to trade metal/currency pairs as it is to trade basic currency pairs. You don’t have to physically own the metal to profit from its price movements.

Those interested in investing in gold or silver long-term can explore the Sprott Physical Gold Trust (NYSE: PHYS), the Sprott Physical Silver Trust (NYSE: PSLV) and the Sprott Gold and Silver (combined) trust (NYSE:CEF.)

Conclusion

Trading spot silver and gold is easy thanks to FX platforms and regulated brokers. However all trading carries risk, and a commitment to learning and discipline is necessary to become a profitable trader.

Take care to do fundamental and technical analysis before your trades. And learn all you can about the assets that you are trading.

The article is a courtesy of commodity.com

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