What is Spot Gold?

What is spot gold?

Online brokers have opened the market for gold traders, who have the ability to trade spot gold similar to the way forex is traded. This offers a way to speculate on the price of gold or for those involved with physical gold, a way to hedge their risk without having to take delivery. One exception is in the United States, where trading gold (and other precious metals) is required to be conducted on a futures exchange,

What is spot gold and how does it trade?

4 Hour XAUUSD Chart (courtesy of The Amazing Trader)

Similar to an fx quote, spot gold is quoted vs. the US dollar. For example, a forex symbol for a currency quoted against the US dollar, such as EURUSD (EUR vs. USD), GBPUSD (GBP vs. USD), etc, spot gold is quoted as XAUUSD (GOLD vs. USD).

The value is determined similar to the way a currency value is determined by the amount needed to buy (or sell) one currency vs. another at any point in time. The reason I mention any point in time is that gold trading is similar to foreign exchange trading as it is a floating rate market with the relative value of spot gold changing constantly.

In the case of spot gold, the value is calculated by what it costs to buy (or sell) gold vs. the US dollar rather than what it costs to buy (or sell) one currency vs. another. Typically, online brokers quote a bid-offered spread with no commissions, similar to the way spot foreign exchange is traded.

Also similar to currency trading where the base unit is 1 (e.g. EURUSD 1.0850 => 1.0850 US dollars = 1 EUR or USDCAD1.3780 => 1.3780 Canadian dollars = 1 USD), spot gold is quoted as one unit. In the case of gold, a unit is one troy ounce. So if gold is quoted at $2680, then it is the cost to buy (or sell) one troy ounce of gold. If the spot gold quote is $2880.20-2880.60, then the broker is bidding $2680.20 (i.e. the price you can sell) and $2680.60 (i.e. the price you can buy). Unlike futures, contract sizes are not fixed and the trader can determine the amount to be traded.

\Just substitute gold for a currency vs. the US dollar and you have XAUUSD. The parameters (e.g. size of bid-offered spreads leverage, etc) offered can vary from broker to broker (note using high leverage has risks and these should be considered carefully whenever trading on margin) and the factors that have made spot fx trading popular have done the same for spot gold trading. These include the ability to trade 5 days per week, 24 hours per day, access to electronic platforms for trading, low margins, good liquidity, bid-offered spreads and no commissions, flexible trade sizes, and the opportunity to trade in both bull and bear markets.

So, what is spot gold?

It is like spot fx trading except gold takes the place of a currency vs. the US dollar. Otherwise, it is offered the same way by online brokers. This includes a similar risk disclaimer warning as when trading fx. One difference is that gold trading can be more volatile than foreign exchange with less liquidity at times and this risk needs to be factored in when trading as well.

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