Spot Trading Gold On Forex Can Be Highly Profitable

By Ahmad Hassam

If you have ever fallen in love with a beautiful person, you then know the value of giving a gold ring or a gold necklace as a token of your true love. Gold has always been considered to highly valuable from the dawn of civilization. It is still considered to be the ultimate currency and a safe haven in times of political and financial uncertainity. Recently gold price crossed the historical barrier of $1,200 per troy ounce. Gold market is in an uprecedented uptrend for the last ten years!

Forex trading is the hottest market right now after the recent stock market crash. Many small investors lost their lifetime saving in the stock market crash of 2008. Investors have turned towards forex in droves. Forex trading is considered to be a recession proof business as there is neither a bull market nor a bear market in currencies. Currency prices are always quoted relative to one anther and currencies are traded in pairs. What this means is that if one currency goes up the other goes down. It is being said that many millionaires will be made in the currency markets.

When you trade a currency pair, you go long on one currency and short on the other. In other words, you simply buy one and sell the other. Many people don't know this that you can trade gold on forex too. Many forex broker platforms that you use to trade forex, allow trading of gold and silver against the US Dollar (USD) from the same platform. Both these precious metals have high demand in the industrial sector and as the global economy recovers from the recession, the prices of gold and silver are expected to skyrockets as industrial production picks up and consumers start buying again.

But when you trade gold, you take long or short position in gold in the spot market with the opposite position in US Dollar (USD). In other words just like trading a currency pair like EURUSD, JPYUSD, GBPUSD and other pair involving USD as the counter currency when you trade gold, you are trading against USD.

So, in spot gold trading on forex, you are trading one troy ounce of gold against USD. Interestingly the symbol for this is also XAUUSD with XAU representing one ounce of gold. Now, suppoe the price quote in the spot market is 1100 XAUUSD. What this means is that one troy ounce of gold in the spot market right now is equal to $1,100 USD.

Now, spot gold trading on forex is a fast moving market. Due to the fast moving nature of the spot gold market, the spread keeps on changing throughout the day! Just like any currency pairs, stock or for that matter any security, the price quote in the spot gold market has got a bid-ask spread. Suppose the price quote in the spot market is 1110/1115. This means is that you can buy one ounce of gold at a rate of $1,115 and sell one ounce at the rate of $1,110 to your broker.

Now a standard lot in currency trading is equal to $100,000. But in case of gold on forex, a standard lot is equal to 10 troy ounces of gold. So, if you find the price quote to be 1112/1117 and you are interested in going long. In that case you will have to buy 1 lot of gold that is equal to $11,170. Spot gold market is a fast moving market and the price quotes keep on changing. So, suppose just after 60 minutes, you find the quote to be 1120/1126. You see a profit and decide to get out selling at $11,200 making a profit of $30. Now if you had used leverage, you would have needed a much lower initial investment to make a profit of $30 in just 60 minutes.

Gold and USD have an inverse correlation relationship. What this means is that the gold prices and USD move in opposite direction in the long term. This inverse relationship may not hold in the short term. But if you are a trend trader or a position trader, you can hedge your position in currency pairs that have correlation with gold prices by taking opposite positions in the spot gold on forex market. - 31876

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