Commodity Trading: Silver & Gold
The oldest gold coin you might find would date from about 50 BCE, when the Roman Empire circulated them for the first time. Several millennia later, when the 1800s were underway, many nations’ paper currencies were attached to gold, but this was to change in 1971 when US President Richard Nixon advised the US Federal Reserve that central banks around the world should no longer be able to exchange their US dollars for American gold, thus removing the USA from the gold standard. Gold, free from the dollar, was driven up in price by those in the business of commodity trading and rose to a value of $600 an ounce by 1980. Following this, the Fed hiked interest rates severely to curb inflation, which dulled down gold demand, sending its price down to $410. Prices remained in this vicinity until 1996, when economic growth sent prices down further to $288. When economic crises like the 2001 recession, the 2008 financial crisis, and the Covid pandemic arose, traders rekindled their relationship with gold, thus affirming its “safe haven” status. Six months after the arrival of Covid 19, gold prices topped $2,069.40 – a new record.
One of the most popular uses of gold is in jewellery making. In 2019, the biggest global gold consumers – USA, China, and India – pushed up jewellery consumption to 4,400 tonnes, so that one half of the gold demand in the world was for the purpose of beautifying people. Gold and silver are also instrumental in the technology sector for the production of such items as medical stents and GPS devices. This accounted for a hefty 7.5% of demand in 2019. The result of this growing trend is that when demand for electronics gets a boost, so does the price of gold. For readers who are interested in CFD commodity trading, let’s run through some of the other movers of gold and silver prices.
What Impacts Gold and Silver Prices?
Supply and demand make gold prices tick. We have already mentioned two key sources of demand, and another big one comes from government central banks. Governments keep monetary reserves, and they sometimes want to add gold to their paper currencies, which sparks a hike in prices. Governments bought 650 tons of gold in 2019. On the commodity trading side, Exchange-Traded Funds (ETFs) that hold the actual metal and track the price of bullion also demand gold, as in the case of the SPDR Gold Shares Fund.
When recessions hit, people want to protect the value of their savings and can turn to gold because it is viewed as a good storer of value. Therefore, the general formula is: when equities returns go down, gold demand goes up. Similarly, in periods of high inflation and political instability, people buy gold, which elevates prices. Gold traders watch the value of the US dollar, because a low dollar boosts demand for gold (since the metal is priced in dollars), and this leads to a hike in prices. On the other hand, if the Fed raises interest rates, demand sinks because gold doesn’t bear interest, which would be bearish for prices.
Silver, which is also used in jewellery and technology, resembles gold in other aspects, too. For example, it is also viewed as a safe haven when the economic world is unstable, and as a weapon against inflation. Not only that, it is also used in industry, and even more so than gold. Automobiles need silver, as do solar panels and silver-oxide batteries. Because of all these industrial uses, silver prices can be more sensitive to economic data than gold.
Commodity trading of Gold and Silver
As we mentioned, a popular means of trading the metals is through ETFs, but not all of these instruments track the price of physical bullion. Some ETFs hold shares in companies that mine gold, or they could track futures contracts, as in the case of the Invesco DB Silver Fund. One reason this method might be preferred to purchasing bullion is that ETFs allow you to invest in price movements in both directions, and since each ETF is essentially a “basket” of assets, they can be a great way to diversify a portfolio.
Another way to gain exposure to gold and silver is through CFD (Contract for Difference) commodity trading. This allows people to trade – not in actual metals or real shares – but in the price movements of gold and silver, or the share price movements of a mining company, or the price movements of an ETF. In this way, storage costs are avoided, and the costs of trading actual ETFs are avoided too. When trading gold as a CFD, traders can take advantage of price increases as well as slumps, since the basis of the deal is only that the price of a commodity or an instrument will change in some way.
If CFD commodity trading is in your future, stay tuned to the various news stories that cover the current geopolitical crises that are known to affect the commodity trading prices of such instruments as silver and gold. That way you’ll be able to make more informed trading decisions and navigate the markets no matter what direction prices are headed in.