Many traders of EUR/USD-the most commonly traded currency pair in the $4 trillion + forex market-pop open the champagne when they have 100 pip profit trading days. These types of days however, can become rare during certain periods. Indeed, there are times when the daily trading range on the EUR/USD is only 50 pips. This can make it difficult for intraday traders, as well as try the patience of longer term traders. For traders of gold (XAU) or silver (XAG) however, 100 pips+ are normal within each hour of most trading sessions, and the daily range of gold, can exceed 1,000 pips, with news days often 2,500 pips. For traders of silver (XAU), these ranges can double or triple that of gold (XAU). Of course, where there is smoke, there’s fire...and the “fire” that can make you wealthy, can also burn you like nothing else.
Most retail traders whom trade gold and silver, started out trading currencies before making the leap to metals. The risks are greater, and account size should be larger to tackle the ranges of metals without jeopardizing adherence to sound risk management, but trading gold and silver can become an excellent supplement to trading other currency pairs. Gold in particular, trades very much like a currency, probably due to the role it plays as an alternative “currency” or historical store of value, as well as a backstop for central banks issuing fiat currencies. Many currency traders will track the price action of gold (or oil) as it often moves in tandem with some currency pairs. Some will use it as a confirmation of general trends-particularly of the USD-as well as an indicator of when markets are moving in and out of “risk on” modes. A few other observations:
Average daily range. A larger than average intraday move in gold would be greater than 2,000 pips (or $20), and 5,000 pips (or .50 cents) in the price of silver. On days when U.S. Non Farm Payroll, central bankers talk, or other significant news is announced, gold can move 3,000 pips ($30) while silver can move 10,000 pips. This type of move in silver represents only $1 in price action and indicates the potential for profits as well as losses. Many retail metals traders will place greater emphasis on trading gold since it is deemed to be a “safer” trade, while silver trades are set aside until technical indicators are just too overwhelming to be ignored. Scalpers in particular, find gold and silver to be especially rewarding. Even with slight movements in price action on days when the market is seemingly stuck in tight trading ranges, scalpers can move in and out quickly and reap considerable profits. For longer term traders, the rewards can be even more substantial. In October of 2012 for example, gold failed to move over $1,800 on several occasions, and some traders saw this as a confirmation the intermediate trend had shifted, and thus entered shorts. For those that kept their trades open through the fourth quarter of 2012 and into the first quarter of 2013, the profits may have exceeded 20,000 pips as price moved $200+. Silver-which tracked the fall in gold prices, moved even more. Usual rule of thumb: when gold takes a giant step, silver takes a giant leap.
Spreads. Most forex brokers now offer gold and silver trading, and on a variety of platforms. The spreads are typically measured by price and are generally around 45-50 U.S. cents for gold and/or silver, though this can vary. Moreover, some forex brokers offer gold and silver paired with currencies such as EUR, JPY, etc. Keep in mind that it’s more expensive to trade metals, but the profit potential is that much greater. Given the higher costs as well as intraday ranges, risk management is crucial for trading metals.
Like a currency, like a commodity. While gold and silver share many characteristics with currencies, and can mirror trading trajectories with many currency pairs, essentially they’re still commodities. This isn’t to say that the USD is not a “commodity” as well, but the ingredients of gold and silver infer a different relationship with the market. Like currencies, supply and demand for metals is one of the key factors affecting the price. However, both are mined rather than printed, and the costs of extraction are salient factors. Gold and silver are tied to jewelry markets with demand in China, India and other developing markets, greatly affecting price. This dimension is growing in significance as emerging markets get wealthier and the demand for precious metals, increases. Seasonal factors such as holidays in Asia can cause spikes in prices, especially since the tradition of gifting gold remains strong. There are also industrial applications for metals-mostly with silver-that affect daily price action and long term trends. For many traders, this is positive as they view the possibility that there could be a “floor” in the prices due to these demand factors. However, given deflationary trends and market crashes in the past, traders should remain cautious if not skeptical
Silver accounts tend to be larger. Trading metals requires more capital. While gold can be traded with a minimum capital, silver is difficult to trade, even when a retail trader has far more resources than he might if he were trading currencies or gold exclusively. The average daily moves in silver are huge, even when compared with gold. Many traders will trade silver only when they can clearly see a direction, and even then, they tend to go in light with each trade, taking very small positions. Silver can make traders millions in profits in a very short period, but it’s just as easy to wipe out or blow out an account, even those considered sufficiently funded. When trading silver, proceed with caution. Moving stops to break even, taking profits rapidly as well as cutting losses with the same zeal, can be an ideal strategy when trading silver, even if that’s not the optimal one to employ when trading other instruments.
Tracking other currencies and markets. Many professional traders monitor gold and oil prices to give them hints regarding the direction of equities and bond markets. This also works in reverse as gold and silver traders will track equities markets to get clues of trading sentiment overall. For those trading the U.S. session, the Dow Jones Industrial Average is one such indicator. Not to place too much emphasis on this, but all markets are tied together (duh!), as traders can display a “herd” mentality. One goes down, and other markets follow, though the added attraction of trading gold and silver, is that they can become “safe havens” as traders hedge their positions.
Long term inflation. Although global inflation appears to be somewhat restrained at present, the longer term outlook is fraught with possible divergences. Global economic growth patterns, will change at some point. In addition, the actions of central banks now and in the future suggest that metals have a bright future. You don’t need to be George Soros or a Jim Rogers to see that many commodities-but metals in particular-will see prices increase over the long term. Traders whom match their strategies to this perspective, could reap enormous profits over the next several years.