I have noticed that many people find this blog by searching for “forex gold trading” and “gold foreign exchange”. I’ll take this as a clue for a post, as it seems that more and more people awaken to the fact that gold is not only a great investment, but a currency in its own right. In fact, gold is a very tradable currency on forex, with a few caveats. I won’t go into the goldbug territory, exposing conspiracies and propheting doom. Instead, I’ll just point out several characteristics that distinguish gold from other currencies and make it a lucrative instrument for online forex trading.
The most important thing about gold is that while all currencies are issued by their respective central banks, gold is not. This gives physical gold its greatest advantage: the lack of counter-party risk. There isn’t a group of people able to permanently affect the value of physical gold. Only short term manipulations are possible. This also makes gold the only inflation-protected currency in the world. However, note the deliberate use of the word “physical”. The above does not apply to forex gold. What you get under the ticker #GOLD in your forex platform is your broker’s IOU, likely backed by a chain of derivatives. The quality of these derivatives depends on the broker, but in general, forex gold is quite a few highly leveraged contracts away from the real shiny and heavy stuff, introducing multiple counter-party risks. If any of these contracts are broken, forex gold is gone. Therefore, while forex gold is a great short term speculative instrument, it is not an investment by any means.
Having established that, here is the second important point: gold does not carry interest, which is again different from any other currency. In most forex accounts, interest is reflected in the form of swaps. Swaps are calculated on the basis of the difference between the interest rates of the purchased and sold currencies, plus the broker’s cut. As a result, long gold on forex has high, and sometimes prohibitively high carrying costs, especially when traded against a high interest rate currency. By the same token, short gold against a high-rate currency is one of the best interest earners. Thus, short is our preferred direction for trading gold online in a forex account.
Third, although physical gold is a necessary holding because of its risk-less properties, it is exceptionally hard to trade. There are significant transaction costs, delivery is often delayed, shorting is next to impossible, no margins available, etc. Forex gold, on the contrary, is available instantly for shorting on margin with very little money and as close to spot price as it gets.
Fourth, I’ll take the liberty to opine that gold is on a tear for fundamental reasons and will continue to be for the foreseeable future. As the only non-inflationary and crisis-proof currency, gold will shine for years to come. One’s exposure to gold should be somewhere between all long and zero, shorting gold is a Russian roulette these days. However, gold’s path to new highs will be highly volatile. There will be sharp drops such as the recent one that present great opportunities for shorting.
Now we have all ingredients for a conservative strategy of an interest-bearing investment in physical gold using forex:
1. Buy and store as much physical gold bullion as you see fit. This will be your long crisis-proof and inflation-protected position.
2. Open a forex account with a reputable broker that offers several gold crosses and an adjustable position size.
3. Devise a signal to short gold. When the signal goes off, short gold in your forex account against a high-interest currency in the amount of your physical holding or less. Put a tight stop on it. Move the stop to a no-loss point as soon as possible.
4. Collect the swaps.
5. Either take profit in the forex position, or let it expire at no loss, keeping the swaps.
Why the need for physical bullion? Simple. Gold is not to be shorted, and gold loses its most attractive qualities if not in bullion form. This strategy is a cheap hedge, allowing to quickly go from full to no exposure at very low transaction costs, while maintaining possession of bullion. Same result can be accomplished with other instruments, but a forex account is perhaps the most flexible way of hedging the downside of gold.
0 comments:
Post a Comment