Gold Price Fluctuations

Fluctuations

As a rule, the gold price depends on worldwide economic situation. Moreover, the gold price has always been an indicator of effectiveness or unprofitability of alternative investment instruments. Gold depreciated in the period of funds turnover and extensive use of different instruments of capital increase. On the contrary, in case of economic stagnation, downturn or recession, gold seemed to be the most stable and liquid instrument of capital fixation and its future saving. The analogy can be drawn to the foreign exchange market: gold can be compared to the Swiss franc which is considered a safe-heaven asset to ride out high volatility.

In other words, when bulls are ruling the market, consumption is rising pulling all the economic sectors up, gold pales into insignificance. But it is temporary.... In August 1998 Russia was going through a tough period: treasury bills depreciation, oil crisis, and subsequent rouble devaluation hit everybody. That time Russians trying to save their capital bought almost all gold at banks and did not regret it. Since August 1998 the price of one ounce has increased three times. Even though the 20% VAT was charged at that time, gold justified investor hopes. However, during that period individuals were able to buy gold only at Russian banks. Meanwhile, the price of one ounce formed on the internal market, and the price of gold was higher than on the world market due to a limited number of providers and high demand within Russia. Now there are possibilities for Russians regardless of crisis locality to buy gold on the world open market. It became possible not only because of financial and stock institutes’ development in Russia, but because numerous brokers appeared providing opportunities to enter the international markets.

As for the current crisis, it has fundamental features. It not only runs through the economic structure of different countries, but provokes recession as well. That is why buying gold is considered as one of the safest way of capital saving. Last year gold quotes surpassed the level of USD 1000. Prices of other precious metals are near the highs. First time for the last 30 years silver approached USD 21 for an ounce. Platinum and palladium rose in price up to USD 2,273 and USD 582 respectively. However, later on prices of precious metals started declining, except for gold. Moreover, despite production downturn and persistent demand for gold among companies, gold hold steady at a high price due to its speculative and capital saving characteristics.

Other factors have influence upon the gold price. For example, the US dollar and the oil price. Meanwhile, the gold price movement is inversely related to the US Dollar and directly related to the oil price dynamics. It is explained by the fact that when the foreign exchange market volatility and the US Dollar rate are decreasing, gold appears to be an alternative investment harbour. While the price of an oil barrel is increasing, gold is the means of petrodollars accumulation.

Transaction Operations

Deposit operations

Being a financial asset, gold can yield revenue if lent. These operations are executed when it is necessary to attract a metal in the account or deposit it for a certain period of time. Gold deposit rates are usually lower than currency rates, which can be explained by high currency liquidity. Standard deposit periods are 1, 2, 3, 6 and 12 months, but they can be changed. Bank attracting precious metals within the framework of deposit contracts can use them for making profit during some time, for instance, financing gold mining or for arbitrage operations, etc. Owners of gold get income from invested gold and avoid expenses of storing a physical metal.

Forwards

Except for the operations mentioned above, other transactions can be executed on the world market. For instance, forward deals which provide for real metal delivery during more than two business days. Making such deal, a buyer ensures himself against gold price increases on the spot market in future. Insurance implies fixing the price which mutual settlement will be executed at. However such deal does not give the possibility to use more auspicious conjuncture. Forward cannot be cancelled. It can be only balanced (forward position is closed) by buying and selling of the stipulated by the deal amount of metal at the current price with future selling it at price the stipulated by the forward contract. Such transactions are made frequently on the interbank gold market. If selling a metal for exact period is necessary, a seller works it off under conditions of spot and then makes a swap deal: he buys a metal on conditions of spot and sells it on conditions of forward at the same time.

Transactions with CFDs

We were considering physical metal markets’ organization and functioning before. However, tehre is another point of trading virtual instruments that arouses interest.

There are hardly any events that had such influence on the financial markets as CFD introduction. The era of unprecedented interest and exchange rates started in the 1970-ies and gave rise to the need for new financial instruments which could be used for managing increased risks. Prosperity of derivative financial instruments industry is connected with its possibility of fast and effective reacting to changing market tendencies. Eventually, a virtual section of the gold market became an independent field with huge turnover which was many times bigger than that of the physical market.

Future (futures contract) is a legal contract binding the parties; one party agrees to execute and the other – to accept delivery of goods in certain amount (and of ertain quality) at a definite time in future at the price set while contract concluding. In world practice, gold futures contracts are traded on several stock exchanges, and the biggest amount of gold contracts is concluded on COMEX in New York. Operations with gold have been executed since 1974 there. The main aims of futures operations are hedging and speculation. Such deals are especially attractive as you do not need to have much money or many goods. Small investments can bring much profit provided the conditions are suitable.

Another popular form of fixed-term contracts is gold options introduced in 1976 and widely spread in 1982 after their execution in the USA.

Option is a fixed — term contract. The client can either buy a call option or sell a put option of a certain standard amount of goods at a fixed price on the exact date (European options) or during the whole specified period of time (American options). The seller of the option sells the right to the counterpart to execute the transaction or cancel the deal. The buyer of the option pays for this right to the seller – option money. The buyer has the right to exercise the option at a fixed price. Therefore, the active party in transactions with the options is the buyer, because this person makes a decision on fulfillment of conditions of the option contract.

Option transactions are often used for hedging. So, if the investor hedges against risks of increases in the gold price, he will be able to buy a call option or sell a put option; if the investor hedges against risks of decreases in prices, he will be able to sell a call option or buy a put option.Compared with other instruments of hedging, an option is attractive, because, besides fulfillment prices fixing to hedge against adverse changes in market conditions, it gives the opportunity to take advantage of favourable conditions. In addition, options promote development of speculative operations. The maximum size of losses of the buyer is limited by the paid bonus, the gains are potentially unlimited. Consequently, the situation for the seller is vice versa.

Options can be involved in over – the – counter market. Such options are called dealer's options. Their main distinction is that they are not issued by an exchange, but an actual legal entity that guarantees the execution of the option.
 

Dealer options can be Divided

Dealer options can be divided into two groups:

Options for selling on the retail market to meet the private speculative demand. Initially, obtaining such options was associated with increased risk, because in the second half of the the 70-ies in the USA there were a lot of cases of fraud involving options because of high market volatility. The reaction of authorities was to introduce new requirements to organization of trading dealers' options. Particularly, it was foreseen to deposit gold in the custodian bank and the option bonus for the dealer before the execution of the option or after the expiration of validity. Gold trading options. The subjects of the deals are gold miners, industrial customers and large-scale dealers.

Deals with such kind of options feature large volumes and longer period of validity. The purpose of such options is to smooth the price risk of producers and consumers of the metal, in other words, it is not the speculative motive, but hedging of the process participants. Unlike stock options characterized by possible transparency of information concerning its key parameters, dealers' options are sold either directly or through a dealer network. Anyway, all the deals with options must be accompanied by appropriate accounting which ensures fulfillment of the option contract terms and reduction of participants' risks.

The volumes of trading futures and options (paper gold) considerably exceed the turnover of buying and selling the noble metal (the latter amounts to only a few percent). At the same time, being the second to the economic meaning of physical gold market, industry of derivatives have recently had a huge impact on the underlying asset price dynamics, because of the superiority of volume. The participants of gold stock deals are interested in high market volatility, because it gives opportunities to maximize the profit. These actions of speculators often sharply increase the movement of the market. Hence, there were the fantastic rise of gold price in 1980 and its rapid drop in 1997 – 1999.

Three Types Of Spot Operations

“Swap” operations

This term is frequently used in economic literature. When it comes to the gold market, it can be interpreted as buying or selling a metal followed by an immediate opposite operation. Such transactions’ volume is larger than that of spot transactions because gold swap does not have such influence on the precious metals market as “spot” operations. A standard operation includes 32 thousands troy ounces (1 ton).

 

 

There are three types of spot operations with gold:

Swap by time (financial swap)

It is a classic type of a swap operation. It corresponds to a combination of cash and fixed-date transactions: buying (selling) of one and the same metal amount on conditions of “swap” and selling (buying) on conditions of “forward”. The date of closer operation’s execution is called the date of valuation, and a further date of operation’s execution is known as the date of swap ending. An agreement can be concluded for any period of time: from 1 day to several months. Usual terms of a swap agreement is considered to be 1, 3, 6 months and 1 year. The essence of such operations consists in the possibility of converting gold into a currency with keeping the right to buy back gold after swap expiration. Before the contract expires, the parties can agree to extend the contract or eliminate the swap making opposite calculations. Swap operations have become popular. First of all, benefit from attraction of financial resources is obvious in comparison with USD deposits’ attraction, because rates of swaps' interest are lower. Moreover, the possibility of smooth gold attraction which can be used for remains of metal accounts managed by banks, for example. Finally, these operations are very popular among central banks. If they want to convert their own gold reserves, they can be sure that their activity will not seriously influence the gold market; instead of being sold directly on the market, gold moves between contractors.

Swap by metal quality

Sometimes, under certain conditions, a market participant needs gold of higher pureness than he actually has. This wish can be met using swap by metal quality. Such swap provides buying (selling) of one quality metal and against selling (buying) gold of another quality at the same time. The party that is selling metal of higher quality receives a reward depending on deal’s volume and risk related to substitution of one type of gold for another.

Swap by place

Such swap provides buying (selling) gold at one place against selling (buying) it at another place. One of the parties receives reward because gold price varies depending on location can be more expensive at one place.

Gold as an investment

Spot markets

 

Current buy and sell transactions are executed on terms of “spot” with the value date (date of entry/ writing-off of metal and currency) being the second day after that of settling a deal. The international market of current transactions is known as spot market.
Standard lot volume on the spot market is equal to 5 thousands of troy ounces. A troy ounce is a generally accepted measure of weight of precious metals; it is 31.1034807 grams. Such operations are aimed at forming precious metals equity of lending institutions and clients’ requests processing. The starting point of gold price setting is the London market - loco London. The term “loco” means the place of metal delivery. It is the most important condition for operations with precious metals.
 

Glossary

Markets & Accounts

Special personal account opened with the company by a client. This account is used to offset the client's and dealer's obligations, resulting from the deals concluded under the present agreement.
Account history – a full list of completed transactions and non-trading operations of a certain trading account.
Accounting currency – currency unit in which deposit/withdrawal operations are performed.
Adviser –a trading account control algorithm in a form of a program engineered in MetaQuotes Language 4 that sends requests and orders to the server via the client terminal (platform).
Balance – total financial result of all fully executed transactions and deposits/withdrawals to/from an account.
Base currency – currency unit in which an account, balances, commission fees and payments are nominated and calculated.
Broker – the firm that provides crediting services and trader support.
Bull market – market that tends towards escalating rates.
Bulls – traders that count on currency rate escalation.
Client – physical or legal party executing operations within the company.
Client log file – file, created by the client terminal, which records all requests and orders sent from the client to a dealer with 1 second accuracy.
Client terminal – Client terminal MetaTrader 4 or 5 software product that lets the client get information about financial market trades in real time mode (volume defined by the company), perform technical analysis of markets, operate, set/change/cancel orders and receive messages from the dealer and the company as well.
Closed transaction – consists of two opposite trading operations of equal volume (the position opening and closing): buying followed by selling or selling followed by buying. Contract specifications
General trading conditions (such as spread, lot size, minimal trading operation volume, trading operation volume increment, initial margin, lock margin etc) for each instrument.
Currency pair – two currencies which make up a foreign exchange rate, for example, EUR/USD.
Dealing – non-cash currency trading.
Dealing center – company that provides access to the money market.
Developer – “MetaQuotes Software Corp.” is the trading platform developer.
Equity – the secured part of the client account, including open positions, that is bound to the Balance and the Floating rate (profit/loss) by the following formula: Balance + Floating + Swap, i.e. the funds on the client account minus the current loss of the open positions, plus the current profit of the open positions.
Figure – price change for 100 pips. For example, price change EUR/USD from 1.3770 to 1.3870 – this means figure increase.
Force major circumstances – occurrences which could not be foreseen or prevented. These include: natural disasters; wars; acts of terrorism; government actions, actions of executive and legislative government authority, hacker attacks, and other unlawful acts towards servers.
Free margin – determines the state of an account. Calculated according to the formula: Equity - Margin = Free margin.
Hedging – operation that protects an asset or liability against a fluctuation in the foreign exchange rate.
Initial margin - cash cover required by the company for open positions maintenance.
Intraday trade – trade oriented at gaining profit within one day.
Lot Size– a quantity base currency in one lot, that is specified in the contract.
Margin – the required equity which an investor must deposit to collateralize a position equal to 1% (when leverage = 1:100) of an open position deposit.
Margin level – determines the state of the account. Calculated according to the formula: (Equity / Margin) * 100%.
Margin trading – use of borrowed money to buy securities with the expectation of increasing profits. Margin trading can bring big returns, but is also risky.
Market opening – trade resumption after a weekend, holidays or after an interval between trading sessions.
Market opening price gap – either of the following situations:
Market opening quote Bid is greater than market closing quote Ask;
Market opening quote Ask is less than market closing quote Bid.
Market-makers – major banks and financial firms that pledge to provide liquidity by accepting the other side of a trade in a currency, security or futures contract.
Non-trading operation – depositing or withdrawing funds from a trading account, or extending credit.
Normal market conditions – condition of a market that meets the following requirements:
absence of noticeable breaks in relation to the trading platform quotes;
absence of rushing price dynamics;
absence of significant price gaps.
Obvious mistake – opening/closing client positions or executing client order at a price that differs greatly from the price quoted per instrument in present flow quoting at the moment of processing. Or some other dealer activity or inactivity that deals with wrong determination of market prices at the present moment.
Open position – the result of the first part of a completed transaction; at the opening of a position, the client accepts the following liabilities:
- to execute the opposite operation of equal volume;
- to maintain equity not lower than 10% of the necessary margin.
Pending order – the client instructs the dealer to buy or sell once the price reaches the order level.
Pips (points) – the smallest unit of price for any foreign currency, also referred to as points.
Price prior to non-market quoting – closing price of minute bar, prior to minute bar with non-market quoting.
Price Gap – either of the following situations:
– Present quoting Bid is greater than prior quoting Ask;
– Present quoting Ask is less than prior quoting Bid.
Quote flow – sequence of numerical data describing the price value of an instrument at a certain time period.
Range – the distance between levels of support and levels of resistance.
Resistance level – highest channel’s borderline.
Rising trend - occurs, when every following value of the wave curve is higher than the previous rate value. The lows of the waves are connected with a straight line of the trend line.
Server log file – file, created by the server, which records all requests and orders received from the client by a dealer, as well as the processing result with 1 second accuracy.
Spike – a comparatively abrupt upwards or downwards movement of a price or value level (usually exceeding spread). Spikes have a peculiarity of recurrence during a certain period of time, from several minutes to several hours. According to InstaForex Public Offer Agreement, all positions opened and closed by non-market quotations are to be cancelled which guarantees the safeguard of funds against spikes.
Spread – the difference in pips between the Bid and the Ask quote.
Support level – lowest channel’s borderline.
Swap – the amount of money deducted from or added to a client account for the overnight position.
Ticker – a unique identification number given to each open position or a pending order in a trading platform.
Trade operation volume – number of lots multiplied by lot size.
Trader – a person, who trades currency on Forex market in order to gain profit.
Trading Account – a unique personalized stock-taking operation register on the trading platform, where complete closed transactions, opened positions, non-market operations and orders are reflected.
Trading operation – an act of buying or selling of any instrument performed by the client.
Trading platform – software and technical facilities that provide the transmission of financial trading information in real time mode, execution of trading operations with account of mutual obligations between the client and the dealer, and control of conditions and restrictions. For the purposes of the present regulation, it consists of “Server” and “Client terminal ”.
Transaction – trade operations where money resources move from base currency into quoting currency and vice versa.
Trend – current general direction of the price movement.
Trend lines – straight lines with a positive slope, plotted on a graph through low points when the tendencies are uprising, and with a negative slope, drawn through the high points when tendencies are declining; the lines define the current trends; the trend line gaps are usually indicative of tendency changes.
 

Technical Indicators

The FXCM IG index Trading Platform allows you to work with a wide range of technical indicators. In other words, you can use various technical analysis tools.

The technical analysis history enables you to distinguish between basic indicator types. These indicators will, sooner or later, be used by all traders for analyzing financial market positions. These traders 4 have built-in indicators that trigger almost every basic indicator that is present nowadays. Working with Trader 4 enables you to use all of them when trading.

A few of Trader 4 terminal indicators are:

 

Standard Deviation
Relative Vigor Index - RVI
Relative Strength Index - RSI
Parabolic SAR
On Balance Volume - OBV
Moving Average of Oscillator - OsMA
Moving Average Convergence/Divergence - MACD
Money Flow Index - MFI
Momentum
Market Facilitation Index - BW MFI
Moving Average - MA
Gator Oscillator - Gator
Fractals
Force Index - FRC
Envelopes
Elder-rays
DeMarker - DeM
Commodity Channel Index - CCI
Ichimoku Kinko Hyo
Bollinger Bands - BB
Awesome Oscillator - AO
Average True Range - ATR
Average Directional Movement Index - ADX
Alligator
Accumulation/Distribution - A/D
Accelerator/Decelerator Oscillator - AC
 
Start working on your technical analysis.

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Economic Indicators

Macroeconomic indicators based on the Gross National Product (GNP), Gross Domestic Product (GDP) and other statistical data characterizes the state and efficiency of a national economy. They are released in the form of reports and have significant impact on the currency rates. Below you can find the list of the major macroeconomic indicators.

Gross Domestic Product (GDP)
Consumer Price Index (CPI)
The Producer Price Index (PPI)
Employment Indicators
Retail Sales Index
NAPM
Consumer Confidence Index
Beige Book
Durable Goods Orders
Employment Cost Index (ECI)
The Productivity Report
Unemployment Rate
Non-farm Payrolls
Factory Orders
Current Account (Balance of Payments)
Initial Claims (Jobless Claims)
Tankan Survey
ZEW Survey
Personal Consumption / Expenditures (Personal Spending)
Personal Income
Capacity Utilisation
University of Michigan Consumer Confidence Index
Philadelphia Fed Index
Chicago PMI Index

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Excerpt From Case Study

 'My ideal stock is one where things have gone wrong in the company, but it looks as if things are changing'(Anthony Bolton, Fidelity Investments)

Case Study

 

Now pay attention and learn from my mistakes! I opened an internet sharedealing account about a year-and-a-half ago. As an internet journalist I thought I ought to test out the services I write about. I invested a relatively small amount in a couple of technology-related investment trusts. In about three months I'd doubled my money.

This investing lark was a piece of cake. Shares only seemed to go up, never down. So I invested some more and bought more technology stocks - companies I thought I knew about.

The internet is undoubtedly changing the way the world works and communicates. It is a major revolution and those companies that are making that revolution happen are going to be massive. That was the investment philosophy, anyway. Then came the first sharp correction in about March 2000. Technology companies both sides of the Atlantic had become ridiculously overvalued. The bubble was about to burst. But did I sell? Did I hell! Strange psychology comes into play. When prices are falling you always think they'll start rising again soon. When they're rising, you always think they'll continue doing so, even if you've already made a tidy paper profit.

I invested more - more than I could afford to lose, another classic investor mistake - and became addicted to the daily excitements of live share prices, sometimes swinging 20% throughout the day, and 'real-time' online dealing. And that's the potential problem with internet dealing. It can become addictive. It's there on your computer screen just a few mouse clicks away. And so you dabble when you should just leave well alone. You're tempted to think more and more short-term when novice investors like me should be thinking about investing for five years at least. Each time you deal, the stamp duty and dealing charges eat away at your capital. The sometimes very wide bid-offer spreads (the difference between the buying price and the selling price) leave you sitting on a loss as soon as you've bought. If the price than falls, your losses are instantly compounded. You panic and sell - you're capital is further eroded.

To cut a long story short, I broke every rule in the investment handbook, including not taking profits when I could. The result is that, along with the rest of the technology sector, my original capital has been decimated. After investing for a year-and-a-half I'm poorer, but hopefully wiser.

These are the lessons I've learned so far. They may seem obvious, but you'll be surprised how difficult it is to do the obvious:

• Decide clearly whether you are a short-term, speculative trader or a long-term investor. Don't fall between two stools.
• Impose stop losses and stick to them rigidly - protect your capital at all costs.
• Never try to guess the bottom of a falling market.
• Don't be afraid to sell up completely and go to cash occasionally.
• Be patient and wait for investment opportunities. Don't dive in at the first opportunity without thinking.
• Take profits when you can and don't be too greedy.
• The trend is your friend - in other words, don't try to beat the market. If it's going down, you probably will, too.
• Don't become obsessed with your favourite stocks. There's not much room for sentiment in investing. Diversify your portfolio across different business sectors so that you're not putting all your eggs in one basket.
• Buying shares solely based tips reduces investing to the level of gambling. Do your own research and follow your own hunches.
• Consider other ways of investing, too, such as unit trusts.

FOREX | CURRENCY TRADING | FXCM | IGINDEX

'Most people who make a lot of money in the markets over the long term do not trade frequently.'
James Morton, 'Investing with the Grand Masters'

What is Forex?

 

Basic Explanation of the Worldwide Forex Markets

The Foreign Exchange Market is the place, where currencies are traded. Currencies are very important to most people around the world, whether they realize it or not. The reason is, that currencies need to be exchanged in order to conduct foreign trade and business. If somebody is living in the USA and wants to buy cheese from Switzerland, either the buyer or the company where he buys the cheese from has to pay the Swiss exporter for the cheese in Swiss Francs (CHF). This means that the US importer would have to exchange the equivalent value of US Dollars (USD) into Swiss Francs. The very same is valid for traveling. A German tourist in Egypt can not pay in Euros (EUR) to see the pyramids because it is not the locally accepted currency. Therefore the tourist has to exchange his Euros into the local currency, in this case the Egyptian Pound (EGP), at the current exchange rate.

This absolute need to exchange currencies is the basic reason why the Foreign Exchange Market is the largest and most liquid financial market in the world. For Facts and Figures of the worldwide Foreign Exchange Market please visit our market overview of the Bank for International Settlements (BIS).

One unique aspect of this international market is, that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange place. The market is open 24 hours a day, five days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across every time zone. This means that when the trading day in the USA ends, the Forex Market begins a new day in Australia, Tokyo and Hong Kong. As such, the FX market can be extremely active any time of the day specially when two major markets are overlapping, with price quotes changing constantly.

One of the main reasons for the immense attractiveness of Forex/4X/FX trading is the Leverage. That's why Forex trading is entirely different from stock trading or futures trading. Foreign Exchange Trading leverage can be enormous, from 1:50 (=invest $ 1, control $ 50) up to 1:1000 (=invest $ 1, control $ 1000), whatever the trader is choosing as risk level and whatever the Broker is offering.

Super high leverage is an important selling point for many Online Forex Brokers. How many times have you seen "control $ 100,000 with an investment of only $ 250"? Those numbers are correct, and the profit (and loss) potential of super high leverage is sometimes scaring, especially for beginners.

How does Foreign Exchange Trading work and how to trade in the Forex Market?

The whole system of quoting prices is quite simple. Currencies are always traded in pairs. All possible pairs have already been created and are available for trading. In other words, you will trade not a separate currency, but the pair and the quote is an exchange rate from one currency to another. The exchange rate is always defined as 1 unit of the first currency in a pair as value of the second currency in a pair.
For example: EUR/CHF=1.2050 means 1 EUR=1.2050 CHF or EUR/JPY=106.35 means 1 EUR=106.35 JPY

When an investor trades in the Foreign Exchange Market, he always trades a combination of two currencies (a cross-pair or currency-pair) in which one currency is bought (long) and the cross currency is sold (short). This means the investor is speculating on the prospect of one of the two currencies appreciating in value in relation to the other one.

If you are investing for example USD 1 with a leverage of 1:400 - you will be in control of USD 400 and the difference of the exchange rate of USD 400 to another currency (like EUR, JPY or CHF), between opening and closing the trade, is your win or loss...