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4 Things You Didn’t Know About Trading Gold and Silver

December 4, 2020
by Nick Alexander, Market Analyst

Article Recap

Both Gold and Silver have always been linked to currency.

If you’re interested in trading Gold and Silver but not sure where to start, or if you don’t know much about this specific market, you can find out how to start trading precious metals with our guide below. 

What are precious metals? 

Precious metals are considered to be quite rare and have a high economic value. This is normally due to factors including limited amounts of the metal and its role in industrial processes. For traders, the most popular metals are Gold, Silver and Platinum. 

Precious metals have played a huge part in global economies throughout history. They have been used as a form of currency at one point and also in the case of the Gold Standard, currencies were also backed by precious metals. 

Now, precious metals are not only used in jewellery and electronics. They are an attractive financial asset for traders as a way of diversifying their portfolios. In particular, Gold is seen as a safe-haven asset and is often used as a hedge against inflation. 

Gold

Gold is a highly valued asset. It’s used in jewellery and melted down to make Gold bars and coins. This particular yellow metal doesn’t rust or corrode but what makes it so attractive to traders? The price of Gold tends to fluctuate on the financial markets. The main cause of that is down to supply and demand. 

Silver

Silver is another precious metal which is also used in jewellery, coins and even electronics. It is seen to be highly valuable as it has the highest level of electrical conductivity. Traders tend to trade this precious metal on the commodity markets based on global macroeconomic trends. 

In a similar way to Gold, Silver has always been linked to currency. Even though it doesn’t share the same status as Gold there are other reasons why traders turn to this particular precious metal. There is a lower cost to enter and open a position in the silver market compared to Gold. It is considered to be a relatively volatile market making it attractive to traders who may want to optimise their chance of bigger returns. However, it is important to remember that all trading involves risk.

Did you know that…

A cartoon with gold and silver bars, titled 'How can you start trading Gold and Silver'You can start trading Gold and Silver CFDs with Eightcap. CFD stands for Contract for Difference. It’s essentially a contract that is made between two parties to trade a financial derivative. A derivative is the value of the financial asset without you having to buy or sell the underlying asset. When you enter the contract between yourself and the CFD provider, both parties will agree to pay the difference in price movements of the financial asset, from when the position has been opened to when the trade’s been closed. A CFD allows traders to speculate on price movements without committing to long-term investments. With CFD trading, you will also be able to access various financial instruments such as Indices or Commodities that may not usually be available in your local market or timezone.

Find out more about trading CFDs with Eightcap. 

4 Things You Didn’t Know About Trading Gold and Silver

Gold isn’t the only precious metal to add into your trading portfolio 

Most beginner traders assume that Gold is the only precious metal available to trade in the financial markets in order to diversify their trading portfolio. However, there are also other precious metals to trade as a way of a safe haven asset such as silver. Each precious metal comes with its own unique characteristics, risks and market opportunities. 

Precious metals are normally traded especially during times of market uncertainty 

If there are financial concerns or the markets are experiencing instability traders tend to turn to precious metals as they store value. An example of this was the sharp rise in gold prices during the great depression.

In 1929, the world faced an economic downturn which we now know as the Great Depression. This slump lasted for ten years and was the most severe economic depression as it impacted global markets. The stock market crash is what caused the depression and shattered the American economy. In turn that caused poor consumer confidence and caused unemployment levels to sharply rise. During this period, the price of gold skyrocketed from $20.67 to $35 an ounce. The reason for this sharp rise in prices was down to people trying to buy Gold as a form of protection against the collapse of the stock market. This eventually led to the Gold Reserve Act which sparked the economy up once again in the U.S. as it required people to exchange physical amounts of Gold to paper money.

Volatility in both Gold and Silver markets

It’s well known that the Gold market has large bouts of volatility due to external factors such as global economic health. When gold is sold, the price of the asset drops and when there is a high demand for the yellow metal prices are higher. It’s an asset that also maintains its value, therefore, a lot of investors and traders turn to it when inflation rates are negative.

Silver on the other hand experiences even higher volatility due to its double functionality as a store of value and a key component in industrial processes. The price of silver is heavily influenced by supply and demand levels, and also recent innovations using the metal.

Since both precious metals are highly volatile, traders are looking for indicators to enter the markets. The Gold to Silver ratio is often used as a general guide for favourable market conditions.

There will still be a risk when trading precious metals 

Even though precious metals can be seen as a hedge against market turbulence there is still risk associated when trading. Therefore, it is important to still place stop-loss limits and take profit levels before placing your order.

Cartoon showing a man falling off a column chart

What is trading on margin and leverage in trading?

Margin trading refers to using borrowed funds from a broker to purchase a financial asset or assets in a larger volume. Traders use margin to buy more stock than they would normally be able to (or afford to do). Margin is then used to create leverage to enter larger trades or open larger positions, in a bid to magnify gains.

Leverage and margin go hand-in-hand, with leverage relating to how the borrowed capital is used and traded. Leverage allows traders to open larger positions by using the margin as collateral or more simply; a safety net. To determine how large your position is, leverage is expressed as a ratio.

To practise trading precious metals with an award-winning broker, open a free demo trading account today. If you’re ready to enter the world’s financial markets check out Eightcap’s account types here and open a trading account with us in three easy steps.

Trading on margin is high risk. Losses can exceed deposits.

All times are AEDT.