Precious Metals Trading: A Beginner’s Guide
All you need to know about trading precious metals with FXTM.
* Trading is risky. Your capital is at risk.
Diversify your portfolio by trading precious metals as CFDs. Go long or short and profit on the price movements. Precious metal trading can be an alternative or a complement to trading other assets, such as currency pairs (or forex).
FXTM’s precious metals include silver and gold against the USD. Get started today by creating an account and, if you use leverage when trading make sure you understand all the risks involved.
Key takeaways
What is a precious metal?
The most well-known and traded high-value precious metals include silver, gold, platinum, and palladium. But there are more, such as beryllium, ruthenium, osmium, rhenium, iridium, and rhodium. FXTM only offers gold and silver trading, so this article will be focusing on those two precious metals specifically.
Precious metals have two things in common: scarcity and usefulness. It’s these things that make them so valuable. They can be used as a reserve for storing wealth, or for industrial applications. Most importantly, precious metals hold on to their value, unlike currencies that are prone to inflation.
For instance, gold has been a form of currency and used by jewellery makers for thousands of years. It stays unchanged, it can be recycled, and central banks hold it in their reserves. About 10% is used in manufacturing, such as electronics, aeronautical circuitry, and medicine.
Types of precious metals
A metal’s chemical composition and physical characteristics are what distinguish them from each other. Most have high luster, hence their use in jewellery. They’re mined as ores and refined, but it’s difficult to achieve 100% purity.
Gold
Gold needs no introduction. It’s held special significance in people’s lives for thousands of years, emotionally, culturally, and economically. The Gold Standard was, in fact, a monetary system in the western countries before the Second World War. Countries pegged the value of their currencies on gold. After the Second World War, the Bretton Woods System began. It established a fixed value for one ounce of gold at $35. Other currencies had fixed exchange rates to the dollar. The Gold Standard system ended in 1971, and the value of the dollar was no longer dependent on gold.
Silver
Often taking second place to gold, silver has extensive uses besides jewellery and coinage. It has excellent thermal and electrical conduction properties, so there's a huge demand for it in the technology industry. Silver ions have antimicrobial properties and are often found in medicinal applications. Silver also makes mirrors in high-tech telescopes and solar panels. It’s rarer than gold, and its main source is as a by-product of the production of other base metals.
Why is gold traded?
Future contracts
Most trading revolves around gold futures. A future is a contract for the physical delivery of commodities at a future date at a price agreed in the present. Commercial gold producers use futures to hedge against price reductions, hence reducing risk. Gold users, such as jewellery companies, may buy gold futures to reduce the risk of price increments.
Diversification
For investors and traders, gold futures provide portfolio diversification.
Hedging
Gold futures, options, and bullion also serve as a haven to hedge against financial uncertainty.
Gold also serves as an inflation hedge because its value remains stable. Currencies may drop in value because of certain actions by central and reserve banks. For instance, the printing of more money to offset audacious spending demands by governments.
The value of gold is determined by supply and demand and is not easily manipulated. It’s also shown resilience against political events.
Speculating and spread trading
Some traders choose to speculate on the movements of the gold price on the spot market. They don't need to buy physical assets. With CFDs, traders only need to open accounts with reputed brokers such as FXTM. They can deposit and go long or short on the value of gold against other currencies such as the USD.
Investments
Investing in gold often requires buying gold bullion offered as coins, bars, or rounds. They will need to store their assets in bank vaults or safety deposit boxes. Some investors may use their homes as storage options.
Retirement accounts
For traders who don’t want to hold physical assets, there is the option to invest in ETFs or mining companies’ stocks. Both methods have dividend pay-outs and they can trade their stocks or ETFs on the stock market.
Precious metals IRAs (individual retirement accounts) provide another means for investing in either gold or silver. However, it's done for retirement purposes and subject to lots of rules.
Why is silver traded?
Like gold, silver trading serves different purposes. Traders may buy silver bullion as means of storing their wealth. They may trade silver indirectly by buying silver futures, options, or investing in ETFs or mutual funds. Speculating on the spot price of silver with CFDs is also extremely popular.
So, why invest in silver, and what should you know when trading silver? For a start, it’s the second most traded precious metal after gold.
Traders may pay attention to the gold-silver ratio, which is the value of silver to gold per ounce. You can calculate the ratio by dividing the present spot market price of gold with that of silver.
The ratio acts as a relative indicator for traders. From about 2013, this ratio has been widening. However, the ratio began narrowing in 2020, showing an increase in the price of silver. Unlike gold, silver is mostly used for industrial applications.
Traders should watch for trends that show economic recovery and increased industrial activity. Increased global demand for silver pushes prices higher. CFD traders may also appreciate that price movement for silver is more volatile than gold. While this may mean increased risk, it also creates more profitable opportunities.
What affects the price of precious metals?
Here are the main factors that have an impact on precious metal pricing:
Balance of supply and demand
Precious metals are inherently rare and finite. No gold will ever be created other than what already exists on earth. But, year by year, demand remains relatively stable. Shortages in precious metals may exist due to many factors and events. Average mine yields of precious metals per ton have generally been going down. Less supply and more demand always drive prices higher.
Macroeconomic
Key macroeconomic factors that may affect precious metals prices include monetary policies, financial market sentiments, and economic cycles. When the global economy performs well, precious metal prices rise.
Inflation and hyperinflation
Inflation results in a weakening currency and a reduction in purchasing power. Investors use precious metals as protection against a weakening currency. More demand pushes precious metals prices higher.
Monetary policy and interest rates
In the face of rising inflation, central banks will increase interest rates to curb spending. Gold, for instance, tends to experience demand when interest rates fall. Its demand falls when the rates increase.
US dollar effect
When trading gold, it’s essential to consider the effect of the US dollar. When its value increases, the gold commodity price tends to fall. Investors from other countries who want to purchase gold with the US dollar will find it more expensive. Therefore, there will be fewer buyers, and this may drive demand down along with prices.
Technological advances
Most precious metals have industrial applications. Technological advances and innovations may affect demand. For instance, a new manufacturing innovation may result in the demand for a certain metal such as silver driving its price higher. On the other hand, if manufacturers substitute silver for cheaper metals such as aluminum, silver futures might be affected.
Government policies
Governments adopt various policies regarding precious metals. In the past, the US has adopted policies to purchase all domestically produced silver. Also, central banks may decide to add more gold to their reserves.
Currency devaluation
Devaluation refers to the measures taken by a bank to devalue its currency. Actions such as selling a country’s gold reserves may result in a devaluation of its currency. Leading up to the 2008-2009 crisis, the Reserve Bank of Australia had sold more than two thirds of its gold reserves. Get the most out of factors that influence the price movements of precious metals. Register with FXTM and start trading today.
What are the main global metals trends?
Global metal trends matter whether you’re making short-term or long-term investments. Historical price charts are a good place to start. You can see the performance of precious metals from year to year.
At the moment, global market prices have experienced sustained growth over the last 10 years. Gold and silver both had record years in 2020, despite the volatility brought about by the pandemic. The last comparable performance was in 2010.
How can traders forecast precious metals’ future? Certain events will influence global metal prices over the long-term. For instance, traders are increasingly investing in cryptocurrencies as a safe haven. It may reduce investments in precious metals. Create an account and potentially profit from the major market trends in precious metal.
Chinese demand
China has dominated the rare earth markets since the 1990s. The country has reduced its production costs through state-operated mining firms and investments in infrastructure. With China’s cheap rare earth metals, it has flooded the market and subsidised prices driving out many competitors.
In 2018, China produced up to 70% of rare earth materials. About 80% of US imports of precious metals also came from China in the same year.
China’s economy heavily depends on precious metals to power their manufacturing needs. What’s more, the domestic market for gold is robust and booms at certain times of the year, such as The Golden Week.
Population growth
Population growth affects the metal industry in many ways. More people means increased demand. People move to urban areas and consume more products, including cars requiring precious metals such as silver. They will also buy jewellery resulting in increased demand for gold. Cities will need to be built requiring metals such as steel. Despite population increases, the relative supply of precious metals does not increase. It remains relatively stable.
Banks keep printing currencies, driving inflation higher. Precious metals will, therefore, hold their intrinsic value and usefulness.
Technological innovation
Mining companies invest in new innovations to reduce costs – such as human labour – and increase profits. In the coming years, it’s likely even more companies will invest in automated mining equipment. Mining robots can also operate in unsafe conditions and work for 24 hours a day.
Traders should also consider technological advances in the recovery and recycling of precious metals from electronics for long-term trading opportunities.
BRICS countries
BRICS is an abbreviation for Brazil, Russia, India, China, and South Africa. As the top emerging economies, they are producers and consumers of precious metals. China, for instance, leads in the production of Gold among BRICS. India has up to 35% of the world’s deposits of beach sand minerals. Analysts consider their mining industry to be running below its capacity.
Traders should closely watch these countries for trading opportunities. They can track the import and export numbers of rare-earth metals, along with monetary policies, interest rates, manufacturing, and GDP figures. BRICS countries have also embarked on ambitious plans to increase their gold reserves.
Where to trade metals
With FXTM, traders may start trading precious metals as CFDs. You’ll find various quotes for precious metals against other currencies. Two of the most popular ways are to trade Gold (XAU) or Silver (XAG) against the USD.
When trading with CFDs, you don’t own the underlying asset. It involves taking positions that predict whether the price of XAUUSD, for instance, will go up in value or down. Opening a long position means buying the asset with the hopes that its price will increase. Your profit is based on the difference in price between the point you opened and closed your position. Shorting the pair means buying it in the hopes that its price will go down.
We recommend conducting fundamental and technical analysis with charts to find trading opportunities. Make informed trades and eliminate guesswork. When trading with an online precious metal brokerage, you can also access leverage. This means you can open a much larger position with just a small deposit. For example, with 1:500 leverage, you could open a trade worth $50,000 with just a $100 deposit. Be aware that leverage can increase your potential losses as well as profits.
Choosing a broker
The first and most crucial step is the selection of a broker for trading precious metals. Here are the features of a trustworthy and reliable intermediary.
Properly regulated
The safety of your funds should be a top priority when dealing with any online broker. Make sure that they’re properly regulated and transparent with their performance statistics. Credible brokers keep their customer deposits in segregated accounts and provide negative balance protection.
Wide range of trading instruments
The online broker should offer a wide range of trading instruments and asset classes, including precious metals. It will allow you to diversify your portfolio.
Flexible trading platform
A precious metals broker should offer a robust trading platform. It should allow you to perform automated trading with expert advisors. Most platforms work on mobile devices, so you can trade wherever you are.
Support for technical indicators, charting tools, and other third-party trading aids is crucial. One of the best trading platforms and the de facto industry standard is the MetaTrader Platform. We offer it at FXTM.
Copy trading
With copy trading, beginners may copy the strategies of experienced and proven traders. On a platform that offers copy trading, you'll typically see the top traders or advisers along with their track record. You’ll need to find a trader with a strategy you like and begin copying their trades with your capital automatically.
Education and trading resources
Choose a precious metals broker committed to advancing the knowledge and skills of their customers. FXTM does this by offering educational resources, including tutorials, webinars, and seminars.
Market analysis
The best brokers have in-house analysts. They provide creative insights for their gold and silver traders. It helps them spot profitable trading opportunities.
Start trading precious metals’ prices with FXTM today
You can trade precious metals on any account with FXTM, including the Advantage account – where the spread for Gold against the Dollar can be as low as zero!
Start by registering or logging in to MyFXTM, and continue by picking the account you’d like to trade on.
If you face any difficulty, you can contact our friendly Customer Support Team. Start trading precious metals with FXTM today!
Frequently asked questions
Precious metals are rare and prized naturally occurring minerals. They are physical commodities that investors can buy and store. Gold is the foremost traded precious metal. It has many applications and serves as a form of currency. Prices of precious metals are expressed per troy ounce for trading purposes.
They buy and sell precious metals either directly or indirectly. Trading takes place on metal marketplaces. The goal is always to buy low and sell high, and profit on the differences in price.
There are different ways of becoming a precious metal trader. If you don’t have (or prefer not to risk) a significant amount of capital, you may consider trading precious metals as CFDs. These are derivative financial products and don’t represent any ownership.
When trading precious metals, silver and gold have the greatest trading potential. Gold prices are more stable. Silver prices experience more volatility, which provides more advantages to speculative traders. However, traders should implement risk management techniques no matter the current market conditions.
Investing in stocks is an approach to purchasing and holding onto equities for a longer period of time. Traders with short term goals generally find commodity or metals trading more suited to their needs.