How to trade gold?
Gold can be traded electronically in the same way as currency pairs. Retail forex brokers usually facilitate gold forex trading through a CFD. This allows retail forex traders to easily participate in the gold forex market where they can take both long and short positions in this valuable commodity.
Because gold can be easily traded on retail forex trading platforms, and because they trade in essentially the same way as currency pairs, many people search the Internet for terms such as “gold forex,” “forex gold,” “gold fx,” and “fx gold,” to learn more about this incredible financial instrument and its successful trading.
This coveted and esteemed metal played a major role in how humans are distributed on planet Earth. Over the centuries and millennia of human existence, countless miners and explorers have traveled thousands of miles to find the rich deposits of this extremely valuable element.
Statue of a Yukon researcher
In these modern times, gold is still a very important commodity. It is also a great financial tool to trade in large quantities, both electronically and physically.
Let’s take a closer look at the history of gold, its production statistics, and most importantly, how to trade gold.
Gold has been an integral part of humanity’s social, political and financial activities for millennia. Ancient kings accumulated large amounts of gold to hire armies, decorate buildings, and make ornate vessels and other royal artifacts. Gold has also been used in dentistry for nearly 3,000 years and is a biocompatible metal that can be used safely in direct contact with the human body.
Although gold has been used as a means of payment for thousands of years, the first gold coins used were traded by Lydian traders in about ..
Today, gold has many more uses than in ancient times. It is an excellent conductor and is used in many electronic devices, including computers and cell phones. It is non-staining, highly malleable and flexible.
Of course, gold is still used to make jewelry, certain coins, and a wide variety of artifacts.
The Golden Standard
The gold standard is a monetary system where gold is directly linked to a country’s currency. In addition to the gold standard, countries have committed themselves to converting paper money into fixed gold. Of course, this made it necessary for them to fix a fixed price for the gold trade at which they could buy and sell.
The Bretton Woods Agreement was a system of monetary governance that governed financial and trade relations between the United States, Australia, Japan, Canada, and Western Europe between 1944 and 1971. This system obliged the central banks of the participating countries to maintain fixed exchange rates for their currencies and the US dollar. In those days, the dollar was pegged to gold, which was fixed at $ 35 an ounce for most of the Bretton Woods era.
Contrary to the classic gold standard of the 1800s, the Bretton Woods agreement had a gold standard. Individuals could not convert their dollars into gold; only the central bankers knew. Other countries have not been able to convert their currencies directly into gold. Only the dollar could be redeemed for gold.
The Bretton Woods agreement stated that foreign central banks could go to the Federal Reserve in New York and exchange their dollars for gold, or their gold for dollars, for a commission of $ 35 plus 8.75 cents. In those days, it was illegal for U.S. citizens to possess or trade in gold, except for collector coins and some jewelry. This law was enforced in 1933, and it was not until 1975 that Americans were free to own and trade gold.
When the Bretton Woods system came into being in 1944, the price of gold was $ 35 in the United States. This price was set in 1934 and remained fixed during the Bretton Woods era.
Although the Bretton Woods system was a remarkable collaboration between the various countries involved, in the end a number of factors worked against it, one of which was gold price arbitrage.
Effects of the Bretton Woods Agreement
In September 1960, gold began trading on the London gold market at a higher rate than the $ 35.17 “arbitrage” price when trading at $ 35.20. The cost of buying gold in New York, including commission, was $ 35.0875, plus an 8-cent delivery to London was $ 35.1675. Round to $ 35.17.
What would be higher than this would encourage the purchase of gold in New York and its transport to London in order to make an arbitrage profit. About a month later, on October 20, the trading price of gold jumped to $ 36, which is now well above the $ 35.17 arbitrage ceiling. A week later, speculators raised the price to between $ 38 and $ 41 an ounce, which now offered a nice premium for importing gold from New York to London.
Meanwhile, the U.S. has printed more and more dollars, and the rate of capital outflows has only accelerated. Foreign central banks accumulated more and more dollars and exchanged more and more gold from New York, which began to put pressure on U.S. gold reserves.
Manufacture of gold bars in the United States
To address the problem of rising gold trade in London, the Federal Reserve has entered into an informal agreement with the Bank of England to re-supply the bank with all the gold it spends in order to curb the price of gold. This was at the discretion of the Bank of England. The combination of this tactic managed to limit the trading price of gold by other U.S. regulations, and by March 1961, the price had been artificially reduced to $ 35.10.
The last major effort to lower the gold exchange rate was in 1961, when Western central banks came together and collected hundreds of millions of dollars worth of gold that would be mobilized to curb the price of gold in London. This was called the London Basin. This large stock of gold had for some time included the price of this precious metal, but in the end there was no way for these central banks to keep up with the ever-increasing demand for gold.
America was constantly printing money to fund its military spending, which increased significantly with the acceleration of the Vietnam War in 1965. At this time, President Lyndon Johnson’s very expensive Great Social Project also demanded money. This project was partly funded by the Federal Reserve, which issued new money to buy government debt.
Demand and supply in the gold market
With a significant increase in the supply of dollars, which led to more and more gold redemptions by foreign governments, America’s gold reserves were depleting at an alarming rate. Foreign speculators were aware of this and knew that the United States would not be able to withstand the continued depletion of its gold reserves. Therefore, these speculators traded in gold and bought gold at a record rate, which became a major problem in the famous London gold pool.
By March 14, 1968, members of the gold fund had sold $ 2.75 billion of this yellow metal, depleting 10% of their reserves. The price of gold was $ 35.20, that was their line in the sand. It was enough. Members asked the Queen of England to close the market the next day and the pool disbanded. Two weeks later, the market reopened. Now the price of gold felt a bit of resistance and immediately rose to $ 38 an ounce. Shortly thereafter, the price rose to $ 42 an ounce.
Needless to say, the United States was eventually forced to completely decouple the value of the dollar from gold (President Nixon in 1973), and the price of gold rose rapidly to $ 120 per ounce. The Bretton Woods system has become history.
Since then, the trading price of gold has been much more dynamic and has risen in value until it peaked in 2011, when it briefly broke through $ 1,900 per ounce. Once this important peak was set, the price moved sideways for about a year and then entered a bear market that lasted for several years. An important lower level was set in 2015, at about $ 1,044. From here, the price has recovered somewhat, but it still lacks a serious bullish momentum.
The largest gold producers in 2019 (mining production)
1. CHINA – 399,700 KILOGRAMS
At present, China is the world’s largest gold producer. It has also been the world’s largest consumer of gold for ten consecutive years.
2. AUSTRALIA – 312,200 KILOGRAMS
Australia is inclredibly rich in mineral resources such as zirconium, bauxite, ilmenite, rutile and iron ore, of which it is the world’s leading producer.
Athough it ranks second in gold production, mine reserves are far superior to those of China.
3. RUSSIA – 281,500 KILOGRAMS
Russia is an extremely gold-rich country, which is not surprising considering that it is the largest country in the world, with a huge area of 17,075,200 square kilometers.
Although Russia has extensive natural gold reserves, in 2016 only 250,000 kilograms of it were mined.
4. UNITED STATES – 253,200 KILOGRAMS
Although the United States is only in fourth place in making gold, it is actually the most stored gold in the world. The Federal Reserve holds more than 8,000 tons in stores under New York, Fort Knox and elsewhere.
The United States is an undefeated treasury, also known as Fort Knox. It is located at Fort Knox Station in the U.S. Army, Kentucky.
5 .. CANADA – 193,000 KILOGRAMS
Add a personal story for just a moment; I had a lot of experience in Canada when I was 17 years old. He was selected to the South African national cycling team, which took part in a 7-day World Cup in Val-d’Or, Quebec. His name is Tour de le Abitibi.
In short, one of the stages, the individual time trial, was held in the last place where a bike race was expected to take place – a gold mine. “Since 2000, one section of the Tour de le Abitibi has been taking place in an underground mine, about 91 meters underground. Cyclists have to cross tunnels and an uphill ramp (17% slope) before racing the streets of Val-d’Or ”. This mine is called the Lamaque Gold Mine.
It was very interesting because we went down to the mine like a typical miner – hard hats, mine lights on our hips, and the cage-like lift that led us to the starting point. It was almost like a bike race and a gold mine tour in one.
I still remember how steep and slippery the driveway was. As he got out of the seat to put more energy on the pedals, the rear tire began to slip on the wet road surface. Then when you reached the top, stepping out of the mine, you hit a sizzling 40 degrees Celsius, which is only about 12 degrees below where we started the race. What an experience!
6. INDONESIA – 190 000 KILOGRAMS
Indonesia replaced Peru as the sixth largest shooter after experiencing a 23% increase in production in 2018. 40% of the island’s gold production was carried out in Grasberg.
7. PERU – 155 400 KILOGRAMS
In Peru, there was a slight increase in gold production in 2019 compared to 151,000 kilograms in 2017. 2014 was a rather slow year for Peru in terms of gold production levels and exports, but since then, Peruvians have been in a better position.
Although Peru’s gold reserves are growing, illegal gold mining activity remains a problem.
8. SOUTH AFRICA – 123,500 KILOGRAMS
Much of the country’s development is due to the abundance of natural resources, but especially its abundant gold reserves.
Although South Africa is indeed a large country, Russia’s land area is more than 14 times larger. However, if we compare the natural gold sources of the two countries, the gold concentration in South Africa is much higher than that of Russia. It is estimated that there are 8,000,000 kilograms of unopened gold in Russia and about 6,000,000 kilograms in South Africa. This means that Russia has only 33.33 percent more natural gold than South Africa, but is more than 14 times larger.
If you calculate the ratio of Russia’s gold weight to land, it is 468 grams of gold per square kilometer. In South Africa, 4.91 kilograms of gold per square kilometer – more than ten times the concentration.
My grandmother’s father, Hannes de Lange, had a gold mine in Rhodesia, now known as Zimbabwe. When gold was discovered at the Pilgrims Rest in the former Eastern Transvaal (South Africa), he moved there, but unfortunately had less success than in Rhodesia.
In those days (around 1873) there was a tremendous amount of gold laundering, and miners found significant amounts of gold dust in the streams of the pilgrim resting place. Nuggets were also found, and the largest recorded weight was 214 ounces (over 6 kilograms). What a find!
Something interesting about South Africa was that until 2006 it was the largest gold producer in the world. However, since 1980, its gold production has fallen by an incredible 85 percent. Some of the factors that contributed to this huge downturn were the increase in labor costs and, of course, all the downtime caused by striking workers demanding higher wages and better benefits.
9. MEXICO – 121,600 KILOGRAMS
Mexico’s gold production declined in 2018 and 2019 compared to 130,500 kilograms produced in 2017. Nevertheless, many new discoveries and new mining developments have taken place in the region.
10 .. UZBEKISTAN – 101,800 KILOGRAMS
Uzbekistan’s gold production remained stable from 2017 to 2018 and 2019. There hasn’t been much investment in research lately, and the country has been mining from old mines for a long time.
The countries with the largest gold reserves in 2019
Fimiston Open Pit, also known as Super Pit (Kalgoorlie, Western Australia) was Australia’s largest open gold mine until 2016. Since then, the Newmont Boddington mine, which is also located in Western Australia, is the largest.
1. AUSTRALIA – 10 000 000 KILOGRAMS
That’s a lot of gold! Of course, given the size of this continent, this extremely large number makes sense. As mentioned earlier, Australia’s gold production in 2016 was 270,000 kilograms, which is 2.842% of its natural reserves. If the country continued to mine gold at this rate (which is not quite possible for practical reasons), it would be able to continue producing gold for the next 35 odd years.
2. RUSSIA – 5300000 KILOGRAMS
As mentioned earlier, this country is extremely large. In fact, it is the largest in the world. This makes Russia’s vast gold reserves a little less impressive. Nevertheless, it is a great benefit to the country, and with the current 250,000 kilograms of mining per year, this reserve should last for another 32 years.
3. SOUTH AFRICA – 3 200 000 KILOGRAMS
This is much more impressive! Although South Africa is a very large country, it ranks only 25th in the world. That’s why a 6 million kilogram gold reserve can really boast! At the current rate of gold mining in South Africa, its gold reserves would only run out in about 43 years.
Although South Africa has three times as much natural gold as China, the latter mines more than three times as much gold as South Africa. There are certainly many reasons for this, but the South African labor problem is definitely one.
As mentioned earlier, there have been frequent disruptions in gold production over the past few years. The miners ’strikes caused serious losses to both the mining industry and the country’s economy. And when locals in South Africa go on strike, there is usually no violence and various infrastructures as well as other valuable things like vehicles etc …
In contrast, Chinese workers are generally disciplined, hard-working people, which is great for any industry’s productivity.
Labor in China is also significantly cheaper than in South Africa.
4. UNITED STATES – 3,000,000 KILOGRAMS
The United States is the third largest country in the world. With 3,000,000 kilograms of untreated gold, it was able to maintain its current mining rate of 209,000 kilograms over the next 14.35 years.
5 .. INDONESIA – 2,600,000 KILOGRAMS
Although much smaller than the United States, Indonesia contains the same amount of natural gold. With the current production rate of about 100,000 kilograms, this country would only deplete this resource in about 30 years.
6 .. BRAZIL – 2 400 000 KILOGRAMS
Brazil is the fifth largest country in the world. Its gold reserves can last for about 48 years with mining 50,000 kilograms per year.
7. PERU – 2,100,000 KILOGRAMS
Peru is much smaller than Brazil and Canada, yet has the same amount of natural gold reserves. At the current rate of mining, its reserves could last for about 16 years.
8. CANADA – 2,100,000 KILOGRAMS
Canada is about 17% larger than Brazil, but contains roughly the same amount of natural gold. However, much more gold is currently being mined in Canada. The current mining rate (170 kilograms per year) would deplete its natural reserves in about 14 years.
9. UZBEKISTAN – 1,800,000 KILOGRAMS
Uzbekistan is the 56th largest country in the world, which makes this number quite impressive. After all, it is more than 22 times smaller than Canada, but contains only about 30% less gold than Canada. The current mining rate would deplete Uzbekistan’s gold reserves in about 17 years.
Gold and Forex
Due to the fact that the price of gold is mostly in US dollars, this is highly inversely correlated with the dollar. If the dollar weakens broadly against other currencies, these currencies will automatically have more purchasing power (directly due to gold being priced in dollars).
The consequence of this is an increase in demand for gold, which in turn raises the price of gold to reach a so-called temporary equilibrium.
The hunting dog and the rabbit
Of course, this inverse relationship between the U.S. dollar and gold is not perfect. It is often a bumpy road. You know, when a greyhound chases a hare in the field, you often see how the hunting dog exceeds the rabbit’s sharp turns when trying to avoid his enemy. Some say this is because the hunting dog runs merely for food, while the rabbit runs for life. I assume there is a lot of truth to this idea, but the main difference in their agility and performance is obviously because of the differences in their physique.
The hare is like a Formula 1 car – flat on the ground and traverses corners quickly, while the hunting dog is like a Ferrari equipped with a dragster engine. Both are fast, but one is faster while the other is more controllable.
It’s the same with gold and the US dollar. These are two completely different devices that are highly interconnected, but their inverse correlation is often completely discarded from the trajectory.
When comparing different financial instruments, we need to be aware that their relationships do not last forever. The dog is often outnumbered and sometimes the rabbit gets away completely. One thing we must never forget is that markets are imperfect.
In addition to all this, there have been cases where the price of gold and the dollar have moved together.
In addition to the inverse correlation of the US dollar with gold, there are a number of other tools that are either negatively or positively correlated with it. The Australian dollar is an example of a currency that often correlates positively with gold. This is not surprising given how important this commodity is to Australia.
The Australian dollar correlates with the price of gold
The Japanese yen often has a positive correlation with gold. As the dollar is negatively correlated with gold, the USD / JPY is then inversely correlated with gold.
Although it is not a currency, silver often moves with gold. However, much of this is related to the dollar because silver is also priced in dollars. Of course, there are other factors that also play a role in this correlation, but these will be examined later.
Gold as a safe haven tool
Let me ask you something – if you knew your country’s currency would be worthless in a few months, what would you do with your money? What would you buy if you did not have access to offshore investments, online trading or physical currency?
Sounds a little distant? Well, it happened recently in Zimbabwe. After hyperinflation reduced the value of the Zimbabwean dollar to essentially zero, it was demonetized in 2015. People who kept their Zim dollars until the end received one U.S. dollar for every 35 Quadrillion Zim dollars that were in their bank account. What a joke!
So, what would have been a really effective hedging deal in this case? Or, alternatively, a safe haven to which you can exchange money? Keep in mind that we are not looking for foreign currency banknotes (in many countries it is illegal to own foreign currency).
Gold may have provided a strong hedge against such a huge currency devaluation. Of course, there are other commodities and commodities that also provide financial security, but few can be converted to cash as easily as gold, and few are compact enough to be transported as easily as gold.
Now, can you say what would help with cash if you lost your value? Well, that’s what’s so good about gold that it can be easily converted to almost any currency. When the zim dollar was demonetized, Zimbabwe switched to the US dollar, the world’s number one reserve currency.
Other currencies were also adopted, such as the euro, the pound, the Japanese yen, the Indian rupee, the South African rand, and so on. This means that if zim held gold instead of dollars, it would have had an asset that could easily be exchanged for any of the currencies mentioned above. All your hard-earned money would be safe because you moved it to a safe shelter.
How is gold used as a safe haven tool?
This is a very basic example of how gold can be used as a refuge. In the investment world, gold is a very important financial instrument that investors use to diversify their portfolios. In the free market system, gold acts as a currency and currency. It is a highly liquid asset that often performs well when confidence in paper money declines.
When stock markets crash or war threatens, gold attracts buyers who urgently need financial security. The risk of gold becoming worthless or almost worthless is minutes. However, currencies and certain other assets exposed to credit risk (and other risks) are particularly vulnerable in times of political or financial instability.
Gold is a popular asylum tool when war is on the horizon.
Although the gold standard was abolished many years ago, investor psychology tends to lean towards the gold trade as the U.S. dollar weakens. Of course, when the dollar moves lower, gold will generally be more valuable to investors around the world because the price of gold is mostly in dollars.
Nevertheless, in addition to the natural effect of the inverse relationship with the dollar, gold can be a huge refuge as an alternative to the dollar. It also has great potential to protect investors from the wider systemic risks of the financial world. It can act as insurance against the modern monetary system, which is largely based on the U.S. dollar, a son’s currency.
While talking about gold as a refuge, I find it important to note how safe gold is as a shelter, it will not necessarily remain permanent in the future. Suppose a lot of money flows into the gold trade over a few months or years because it is attractive to investors. Should there be a sudden market turmoil and fear in the investment world, some of these funds would probably have to be transferred to other assets or portfolio stocks due to liquidity constraints. In this case, gold may be a weaker-than-expected safe haven.
Other factors need to be considered that other safe havens may indeed be more desirable than gold in times of instability, and that the dismantling of transportation transactions can be an important determinant of money flow when fear frustrates markets.
The Japanese yen is a very important refuge. Investors often borrow Japanese yen (at nearly zero percent interest rates) and use them to buy higher-risk, riskier assets such as stocks, high-interest currencies such as the New Zealand dollar, the South African rand, and so on.
When fear grabs investors and they scramble for security, these assets are again exchanged for the Japanese yen, which can significantly strengthen this currency. The funds return to where they came from, and this flow raises the funding currency (yen). Japan’s political and economic stability also makes the Japanese yen a safe haven.
In the second part of the article, we cover all the important aspects of the gold trade. This includes the value of the pip, the size of the contract, the calculation of profit and loss, related instruments and the main economic events affecting the price of gold.
Click here to read the second part of the Gold Trade Marks Guide.