Trading Gold and Silver

Adam Lemon

Trading gold and silver has become increasingly popular over recent years. More and more Forex brokers are offering trading in gold and silver, as well as some other precious metals such as platinum and palladium, but gold and silver take up most of the speculative interest in this category. In addition to trading precious metals virtually, there are a lot of offers available to buy and sell gold and silver bullion and take physical ownership in the shape of coins, ingots and other collectables; but this article will focus on the online trading of gold and silver.

Precious metals such as gold and silver have traditionally been currencies themselves, falling naturally in the “Forex” category being fully replaced by fiat currency over recent decades. Unfortunately, a lot of people lose their minds a little over precious metals, especially gold, forgetting that it is just another commodity to trade. There are two main reasons why people go crazy over gold: firstly, its unique position in most human cultures as the epitome of a store of value (i.e., it is considered a “safe-haven” asset); secondly, monetarists believe that due to the global fiat currency system, one day all currencies will collapse and precious metals will become enormously valuable, which is highly questionable.

Gold and Silver Price Behavior

To trade gold and silver successfully, it is important to put thoughts of the commodity itself out of your mind and just focus on the behavior of its price. Gold and silver prices are traditionally quoted in U.S. Dollars, but some brokers will price it in Euros and other currencies. If you do trade these metals against currencies other than the U.S. Dollar, do keep in mind that most of the world watches it against the U.S. Dollar, so keep an eye on what is going on there.

One of the main reasons why trading gold and silver can be more attractive than trading Forex is that these precious metals usually move in bigger increments than Forex currency pairs. The major Forex pairs typically fluctuate in value by much less and have a greater tendency to revert to mean values. For example, at the time of this writing, over the past 1,000 days the four major currency pairs move by an average of 1.00% per day, while Gold in U.S. Dollars has an average of 1.40%, while Silver is even more explosive, averaging 2.78% per day.

It’s important to consider that commodities generally move by considerably more than currencies, but minimum trading sizes in commodities other than gold and silver are typically much larger which can cause position sizing problems for retail traders with smaller sized accounts. When it comes to long-term price movements, gold and silver beat Forex hands down: while 30% moves within a year do happen from time to time in Forex, and rarely even by a little more than that, major currencies never move like Gold and Silver do, recent years have seen a 70% annual increase in the price of gold and a near tripling (200%!) in the price of silver, each denominated in U.S. Dollars. This means that even though you might need wider stops than in Forex trading, there is often much more potential profit on the table. However, leverage offered is typically considerably lower compared to Forex currency pairs, and overnight financing charges are typically higher.

Gold and Silver Trading Method

If you are reading this and thinking that trend trading gold and silver is the way to go, you are probably on the right track: as with Forex currency pairs, trading in the direction of the multi-month movement in price has been a profitable strategy in recent years, although over a somewhat longer-term time frame, with the six-month trend being most predictive overall. This result is arguably distorted, however, by the fact that the precious metals have generally been buoyant against national currencies, and here we get close to the hearts of those who believe that all non-convertible, fiat currencies are inevitably eventually debased against widely accepted stores of value such as precious metals. It is certainly true that it is hard to find a strategy which has been profitable in recent history over the long-term which is based upon shorting gold and silver against currencies. Time of day, contrary to popular myth, is not especially important.

Gold or Silver?

Which is a better investment, gold or silver? There’s no question that gold is favored more by traders than silver. This might be a mistake, as recent years have seen even larger moves in silver than have been seen in the price of gold. While one reason for this is psychological as gold looms large as a store of value in the human imagination. Another reason could be the total spread/commission charged in these instruments by gold retail brokers. At the time of writing, most brokers offering gold and silver typically charge about 50 cents on gold, which equals about 0.04% of the price, and 2 cents on silver, which equals about 0.10% of the price. It is possible to find brokers requiring high minimum deposits with spread/commission as low as half of these amounts, but even so, they are more expensive instruments to trade than Forex currency pairs. When you consider the larger movements though, it is easy to conclude that they are still worth trading.

Gold and silver have a high positive correlation, i.e. they tend to fluctuate in value together. To give you an idea as to how this has worked in recent years, look at the chart below showing both against the U.S. Dollar. Gold is marked in red, and silver is marked in blue:

Gold and Silver

This does not mean that you should not be prepared to trade both gold and silver, but what it does mean is that you should make sure that you do not have too much of both in the same direction at the same time. For example, instead of having 1 unit of long gold and 1 unit of long silver, it would probably be better to make sure you have about 1.25 units of both simultaneously as a maximum.

Gold and Silver Trading Strategy

Finally, how could you build a trading strategy for these precious metals? Trend trading strategies typically have produced the best results. Well, they both tend to move fast and quite explosively, so buying new highs in strong uptrends when the price is above its level from 6, 3 and 1 months back has been a successful method, especially when using volatility rather than candle-based stops. With commodities such as these, it has been very profitable to sit back and let winning trades run and run.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

Did you like what you read? Let us know what you think!

exclamation mark

Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

0 User comments

exclamation mark

Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

Read more
Add new comment
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.