XAUUSD – Commodity

Instrument description

One of the most popular and sought after metal is undoubtedly gold. There have been many famous idioms and phrases that authenticate the value of gold, such as ‘gold standard’, ‘worth one’s weight in gold’, ‘old is gold’, and ‘as good as gold’. Gold is recognized as the most precious and valuable metal in the world. Gold is a mark of wealth and prosperity for centuries.

Gold serves wide purposes in different industries and sectors of the market. Gold is also the most widely traded metal in the commodity market. Gold deposits are difficult to find, which increases the value of gold, and gold mining and production requires considerable amount of resources and effort. Gold is used in electronics, dentistry, and, most importantly, jewelry making. But apart from its industrial uses, gold holds an essential position in the financial systems as, before paper currency, gold was the standard mode of the financial transaction.

According to the latest statistics, the total global supply of gold is 170,000 tons. The number of gold production has increased three times since 1970. Once the gold is extracted, the gold is refined and used in gold bars, ingots, and coins, which is also called the ‘Gold Bullion’ and one of the ways of investing in gold. You can buy a gold bar or coin and keep it as an asset that you can later sell in times of financial need. The buyers may then use the gold to make jewelry, in coins, or in making electronic components. The main uses of gold includes

• The number one use of gold is in making valuable and exquisite gold jewelry such as rings, bracelets, necklaces, earrings, and watches.
• Gold is an excellent conductor which is why it is used in switches, connectors, and relay contacts in mobile phones
• Gold is used as medicine and in salts to treat patients with arthritis.
• Gold is used by investors to diversify their investment portfolio and to hedge against inflation. Investment in gold is usually made through gold bars, coins, ingots, and funds
• Many countries store gold reserves to steady their fiat currencies. Countries such as the USA, Italy, France, Germany, and Switzerland have huge gold reserves.

A popular term regarding gold is 14K or 14-carat gold which means if the ring is made of 14K gold then it has 58.3% of pure gold while the rest 41.7% is made up of different metal alloys such as copper, silver, zine, or nickel and with a plating of rhodium. The original and pure gold is 24K and does not include any alloy. But pure gold is expensive, heavy, and easily damaged because it is malleable.

History of Gold

Gold is mined from nearly every continent of the world except Antarctica. The supply of gold above the ground is limited, and deep gold deposits beneath the earth’s surface are difficult to extract. Gold mining is a challenging and expensive endeavor. Gold is not only present on land but also in ocean waters, and research studies suggests that there are almost 20 million tons of gold in the ocean surface, which is significantly more than the gold ever mined. But gold is a rare metal and the total annual supply of gold, according to the World Gold Council, is almost 197,580 tons.

According to analysis, if all the gold ever to be mined is somehow combined into one cube, then the size of that cube would measure up to 21 meters per square, which is just a fraction less than the standard length of a tennis court. For many years, South Africa was considered to be a leader in producing gold, but in recent years, it has struggled to maintain its top position, and countries such as Russia, Australia, and China have increased their gold production. The top five gold producing countries are

1. China - 400 tons
2. Australia - 312 tons
3. Russia - 281 tons
4. United States - 253 tons
5. Canada - 193 tons

Gold reserve refers to the amount of gold held in the national bank of a country which serves to pay depositors or noteholders, as a store of value, and to support the value of the national currency. Gold is considered as the best financial asset as the value of gold remains the same and even rises in times of global economic inflation and recession. Gold is measured in troy ounces, and one ounce is equal to 31.1 grams.

The ‘Gold Standard’ may not be used to determine the value of currencies, but gold still holds importance in the financial systems of the world. Gold is held by the national bank to provide stability, and gold can be converted to cash when needed. The top five countries with the biggest gold reserves are

1. USA - 8134 tons
2. Germany - 3364 tons
3. Italy - 2452 tons
4. France - 2436 tons
5. Russia - 2242 tons

What is the significance of XAU/USD

The chemical name of gold in the periodic table is given by ‘AU’. In the XAU/USD forex quote, the XAU stands for the value of gold, and USD represents US Dollar. The XAU/USD is a currency exchange similar to GBP/USD that shows how many US Dollars are required to buy one Great Britain Pound.

The XAU/USD quote shows how many US Dollars are needed to buy one unit of gold (one troy ounce). The term gold spot price or spot gold denotes the current price of gold, at which you can buy or sell an ounce of physical gold. The highest price for gold ever recorded since 1979 was $2020 in September 2011.

Supply and Demand of Gold

The economic principle of supply and demand play a critical role in determining the present and future value of gold. The price of gold is known for the balance between the market demand and supply of gold. Gold is a rare metal, which means with increased demand, there will be an increase in prices of gold. The discovery of new gold deposits or a decrease in extraction cost can lower the gold prices. When the gold prices increase, the mining companies profit and more gold is supplied in the market. Similarly, when gold prices decline, the mining companies do not get profit, and the supply of gold is decreased.

How to read the price change of Gold

Gold is an expensive and valued commodity that is traded on the New York Mercantile Exchange (NYMEX), London Metal Exchange (LME) and Chicago Mercantile Exchange (CME). Silver is actively traded for 24 hours and 6 days a week on the CME Globex, which is a global electronic trading platform. The symbol of wheat on the CME Globex is ‘GC,’ the price quotation is in $10 per one tick, and the contract unit is 100 troy ounces. The trading hours are 22:00 and 20:59 (GMT).

In the UK, the timings are Sunday to Friday from 6:00 to 5:00 P.M. The timings to trade silver CFDs are

• Monday to Thursday, from 00:00 – 21:00 and 22.05 – 00.00
• Friday, 00.00 – 21.00; and
• Sunday, 22.05 – 00.00

The gold prices fluctuate quite regularly but mostly see an upward trend since the 1970s. The peak was reached in 2011 when gold was valued at $2020 in September, but nearly 40% of the peak value was lost in the following four years.

When we analyze the gold price chart, we see the gold prices trading from $1450 to $1650 per troy ounces from September 2019 to February 2020. There is a sudden decline in gold prices in March 2020, and the price falls to its lowest value of $1456.02 on March 19, 2020. The gold prices slowly rise in April and keep on rising steadily. The current value of gold is also its highest value, which is $1815.49. The Bid price is $1816.24, while the Ask price is $1815.43.

How to Trade Gold

Gold is a most prized metal with substantial value, and trading gold can be rewarding but involves careful trading strategy and risk management. Both trading and investing in gold diversify an investment portfolio may reducethe risk of financial losses and hedge against inflation. The need for gold will increase due to its important demand for extravagant jewelry items, industrial use, and a particular part in financial systems. The popular ways to trade in silver are Bullion, Exchange Traded Funds (ETFs), Futures, Options, Contract for Difference (CFD), and Shares.

Investing gold through gold Bullion is the easiest way, but you will need a storage facility to keep the gold bars or coins, and eventually, you have to pay the storage costs. The Gold Futures contract is a derivative contract that indicates the amount of gold that will be delivered to you in the future at a predetermined value. The contract is settled with physical delivery of gold; however, you have to consider interest rates and storage costs when trading through Futures.

Another way for trading gold is by using CFD, which is a contract that allows you to speculate the price difference of underlying gold from opening to closing of the trade. You have the advantage of trading by using leverage, there is no stress of buying or storing physical gold, and having the option to profit from both the Bullish and Bearish trends. CFDs allow you to magnify your gains, but there are considerable losses due to leverage if your prediction is wrong, so a risk management tool may be employed.

Another way to invest in gold is by acquiring shares of gold mining and exploration companies. The gold mining companies profit with the increase in gold prices and pay handsome dividends to the stakeholders. Some of the popular gold mining and exploration company includes Barrick, Polyus Gold, Newmont Mining, and Newcrest Mining.

What causes the price change of Gold?

The production of gold tripled since the 1970s, and the amount of gold that has been purchased has also increased four times. The price of gold was $43 per ounce in 1972, but today it is nearly $1820 per ounce. The factors that determine the price of gold are

• Supply/Demand Imbalances

Supply and demand play a crucial part in determining the price of gold as with all the other commodities. When the supply level decrease, the price of gold goes up automatically. The political unrest or labor strikes in gold mining countries can drastically affect the supply of gold. The rise in extraction cost also restricts the gold supply. The price of gold is moved by the gold demand in jewelry making, industries, and as an investment.

• Central Bank Policies

The central banks of countries usually store gold, and it is called ‘gold reserve.’ The policies of central banks influence the price of gold. The decision to increase the money supply can increase gold trading. The decision to accumulate or sell gold also drives gold prices.

• Economic Data

Gold, like every other commodity, is denominated in US Dollars, but it is a direct but inverse relationship. The economic growth and stability of the US also directly impact the value of the US Dollar and, subsequently, the value of gold. For instance, a strong US Dollar means that the price of gold will fall, and a weak US Dollar means that price of gold will increase.

• Investment Option

Gold is always the first choice of investors when it comes to investing in metal commodities. Gold diversifies the investment portfolio and can retain its value despite inflation and currency devaluations. Gold can be invested through Gold Bullion, or derivative contracts such as Futures, Options, CFDs, and also through ETFs.

The US Federal Reserve Bank, also called the Fed, usually keeps the interest rates minimal and maintains the value of the US Dollars to prevent inflation. The price of other precious metals also impacts the price of gold, particularly of platinum, and in some cases, platinum is even valued higher than gold as it is considered more rare as compared to gold. But platinum has wide industrial usage than gold, and the price of platinum depends on the overall global economic situation. The global political situation and uncertainty always drive the traders and investors towards gold, which increases both the demand and price of gold.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.