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Spot Metals trading

What is Spot Metals trading?

Everything you need to know about the precious metals and the differences between them - including how to trade them.

Gold and silver are two of the four precious metals, which are generally considered to be gold, silver, palladium and platinum. Aside from their use in jewellery, they may have important applications in engineering, electronics, and medicine. These metals are also recognised as mediums of trade in their own right and are considered by many as two of the oldest ‘currencies’ in the world.

Throughout the ages, gold and silver have always had high inherent value. They tend not to corrode or tarnish and are inherently durable, which has made them the metals of choice for currency and jewellery throughout human history.

They are not the only high-priced metals. Iridium and ruthenium are costly, but these are less well known and consequently less popular for trading purposes.

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Gold

Gold has been used in the production of luxury goods since prehistoric times. It’s rarity, and its resistance to decay and tarnishing has made it precious to virtually every civilisation, while its softness and malleability makes it easy to work into jewellery and decorative items.

It is also increasingly in demand from the electronics industry, thanks to its exceptional conductivity.

Silver

Silver has anti-bacterial properties as well as high conductivity, making it ideal for a wide range of applications, including dentistry and water purification as well as electronic engineering – in additional to jewellery.

Platinum

Platinum in its pure form is used in jewellery and dental work. But it is also in demand for catalytic convertors for motor vehicles. It may also be used as an alloy. An alloy of platinum and cobalt is used to make magnets. It is also used in some chemotherapy drugs

Palladium

Palladium is similar to platinum and more than half of all palladium produced is used in catalytic converters for cars. It is becoming increasingly in demand for jewellery, and there are a number of new uses for palladium as a catalyst in organic chemistry, and synthetic biology.

The combination of inherent value, and steady demand has meant that some precious metals are seen as concrete stores of wealth during times of market uncertainty. These are known as safe havens, a means of preserving value when equities and other holdings may be expected to fall in times of market uncertainty.

How are precious metals traded?

Trading in precious metal has been central to trade for millennia, and remains at the heart of commodity trading today, with gold being the metal most commonly used for this purpose.

Investing directly in gold bars is one way to access these markets. One of the largest markets for gold bars is organised in London. Here the standard size of bar is 400 troy ounces, although smaller bar sizes are available. The standard size for silver bars in the London market is 1,000 troy ounces while for platinum and palladium, the London market trades bars between 1 and 6 kilograms.

However, physically trading and taking direct ownership of precious metals requires specialist vaulting and custody arrangements, secure transportation and insurance coverage. Indirect trading, through instruments such as ETFs, futures and CFDs may provide a more practical way to access the potential of the precious metals market.

What drives precious metal markets?

Like other commodities, precious metal prices are driven by the basic factors of supply and demand.

Gold demand used to be dominated by the jewellery business and although this remains the case, the sector has declined from an 80% market share in 2002 to 50% in recent years. This is largely due to the popularisation of gold as a means of investment. Investment demand for gold bars, coins and ETFs surged between 2003 and 2013, greatly contributing to high gold prices at the beginning of the 2010s before declining somewhat and stabilising at around 30% of the market.

Meanwhile, supply is relatively constant. The supply of all four of the main precious metals - gold, silver, platinum and palladium - comes to the market from two sources: mining production and recycling of scrap material.

Mining provides between 70-85% of total precious metal production. The well-developed trade in recycled material will account for the remainder, and the actual proportion fluctuates with time, reflecting the changing cost of production, reclamation values and the economic outlook.

Although it is possible that new deposits will be found, reducing the cost of supply, it is demand that has the biggest impact on precious metals prices. After all, gold and silver are finite resources, and unlike traditional currencies, central banks cannot simply print more gold in times of economic need. All the metals have industrial uses, and the demand by manufacturing will fluctuate with the level of the broader economy. However, precious metals and particularly gold are widely held as investment commodities. As a ‘safe haven’ investment, gold may therefore move in a contrary direction to the general economic trend. When stocks and currencies fall or the market faces an extended period of uncertainty, the price of gold often rises. Conversely, when the stock market is performing well and the market has a larger appetite for risk, gold prices can fall.

As well as private investors, central banks hold a significant amount of their reserves in gold.

The IMF and the World Gold Council estimate that the world’s central banks hold around 33,000 metric tons of gold. Any factors which affect the central banks’ tendency to hold or sell gold will have a significant effect on the market price.

How can you profit from precious metal trading with CFDs

CFD (Contracts for Difference) trading is a method of trading in which an individual trader opens a position rather than purchasing the underlying asset directly.

CFDs allow traders to speculate on the way the price of a commodity will change, without ever owning the commodity itself. Traders who expect the price of gold, silver or any other precious metal to go up will buy a CFD. Traders who expect a fall will open a sell or ‘short’ position. The profit (or loss) comes from the difference in price between opening and closing the position.

Being able to make a profit in a falling as well as a rising market is particularly attractive when markets are volatile.

Why trade gold and silver?

Gold has historically been a safe haven asset in times of market uncertainty. Learn the benefits of gold and silver with our in-depth guide.

The precious metals, and particularly gold and silver have been traded since prehistoric times. The reason for their high value is the result of their rarity. They are expensive and difficult to mine, and in demand for their decorative and physical properties, being used for jewellery and decoration, and as a medium of exchange, either by weight or in the forms of coin.

In the modern world they have retained their appeal for jewellery and coinage and have actually increased in importance because of their use in electronic equipment and medical applications.

They are also seen as stores of wealth or safe havens in times of market uncertainty.

There are a number of ways to trade gold and silver.

Physical trade in gold and silver

Unlike other commodities, gold and silver have a high intrinsic value. It is perfectly feasible to trade in bullion or coin. Many investors have some of their holdings made up in this way – although there will inevitably be costs for storage and insurance.

Commodity traders dealing directly in gold and silver aim to buy when the price is low, which is usually determined by an abundance of supply and falling demand. They sell when they believe the supply is outweighed by the demand, which can result in a profit.

However, like other commodities, the price of gold and silver can fall as well as rise, and this approach can be a disadvantage when prices are falling.

As well as physical trading, it is possible to invest in commodity stocks and exchange-traded funds (ETFs). Stocks provide indirect exposure to precious metals through the companies involved in their production and use. Commodity ETFs – such as a gold ETF – will be set up to closely follow the price of that metal in the underlying market.

Again, this approach can be a disadvantage when prices of gold and silver fall.

It is also possible to speculate on the price of gold and silver without physically buying metal through a number of financial derivatives. Using these, it may be possible to profit in a falling gold and silver market, as well as a rising one.

Gold and silver trading with CFDs

CFDs (Contracts for Difference) are a derivative instrument that can be used to trade commodities, and can be used to trade gold and silver, without ever owning the metal in question.

A CFD is a contract between a trader and a broker with a set end date. Traders who expect an upward movement in price will buy the CFD and go long, while those who see the opposite downward movement will open a sell or ‘short’ position. At the end of the contract, the two parties exchange the difference between the price of the metal at the time they entered into the contract, and its price at the end.

So if you opened a long (buy) CFD trade on silver when it was priced at £1,500, and you closed the trade after the price of silver rose to £1,600, you would make a profit on the difference in the price of £100. If the price fell to £1,400, you would make a loss of £100.

In practice, it's important to remember that your trading profit isn't simply the difference between the opening and closing price of the trade - you also need to consider the costs of trading such as the spread.

CFDs can be simpler than other trading vehicles like options and futures. The relative ease of entering and exiting positions has helped make trading commodity CFDs popular, but there are a number of other benefits.

The first is the availability of CFDs. Commodities including gold and silver are traded globally, across exchanges around the world. This means that traders can trade twenty-four hours a day, five days a week.

Being able to trade around the clock allows a dedicated gold and silver trader to keep a very close eye on the factors that influence prices, and to react immediately to any changes that would affect a position.

Perhaps even more important is leverage. Leverage is a key feature of CFD trading, because it allows a larger market exposure for a smaller initial deposit. Leverage works by using a deposit, known as margin, to provide increased exposure to an underlying asset. In other words, it means putting down a fraction of the full value of the trade.

It can be a powerful way to increase exposure and potential profit, but it can also amplify losses.