Precious Metals Trading Explained: Gold (XAU/USD) and Silver

Gold and silver are the most widely traded precious metals. Gold has been a store of value and a monetary asset for thousands of years. Silver shares that history but is also consumed in large quantities by industry. For a trader, both are liquid markets that trade nearly around the clock on weekdays, with behaviour that differs from currencies and shares.

How gold and silver are quoted

Spot gold is quoted as XAU/USD: the number of US dollars needed to buy one troy ounce of gold. XAU is the ISO currency-style code for gold, and XAG is the code for silver. A troy ounce is 31.1035 grams, slightly heavier than the ordinary (avoirdupois) ounce used for food. Quoting in dollars means the metals move against the dollar just as a currency pair would, which is one reason forex brokers list them alongside currencies.

The London market sets a widely used benchmark, the LBMA Gold Price, through an electronic auction held twice each London business day. Spot quotes on trading platforms are derived from interbank and exchange prices throughout the day, and futures on the CME's COMEX exchange are a major source of price discovery.

Contract sizes depend on the instrument. One COMEX gold futures contract covers 100 troy ounces and one COMEX silver contract covers 5,000 ounces. CFD and spot-metal lot sizes are set by each broker, and some quote a standard lot of 100 ounces while others allow fractions of one ounce. Check the contract specification on your own platform before sizing a trade.

What moves gold

Gold pays no interest or dividend, so the cost of holding it is the income you give up elsewhere. That is why gold is often discussed alongside real yields, meaning government bond yields after inflation. When real yields fall, holding gold costs less in forgone income, and gold has often (not always) done well. When real yields rise, it has often struggled. The relationship is a tendency, and it has broken down for extended periods.

• The US dollar. Gold is priced in dollars, so a weaker dollar makes it cheaper for holders of other currencies, which can support demand. The inverse relationship is loose, not fixed.
• Central banks. Official-sector buying is a large and sometimes persistent source of demand, and the World Gold Council publishes quarterly figures on it.
• Safe-haven flows. In periods of financial or geopolitical stress some investors buy gold as protection, though it has also fallen in sharp liquidations when investors sold what they could to raise cash.
• Inflation expectations. Gold is often described as an inflation hedge. Over short windows the link is weak, and it is stronger as a long-run store-of-value argument.
• Investment flows. Purchases and sales of gold-backed ETFs, and positioning in futures, can add to short-term moves.
• Jewellery and technology. Jewellery demand, concentrated in India and China, is a large part of annual consumption and tends to be price sensitive.

Scheduled data matters because it moves rate expectations. Inflation and employment releases can move gold within minutes. The nonfarm payrolls and CPI article covers how those events are traded and why spreads widen around them.

How silver differs

Silver is both a monetary metal and an industrial input, used in electronics, solar panels and other manufacturing. The Silver Institute's recent World Silver Surveys put industrial use at more than half of annual demand, with the remainder split between jewellery, silverware and investment. A good share of silver supply also arrives as a by-product of mining other metals, such as copper, lead and zinc, so supply does not respond quickly to the silver price alone.

In practice silver is the smaller and thinner market, and it typically moves further than gold in percentage terms, in both directions. Expect wider swings, which means a given dollar stop distance represents a different share of the price than it does in gold.

The gold/silver ratio

The gold/silver ratio is the number of silver ounces needed to buy one ounce of gold. Some traders watch it as a relative-value gauge, treating a very high or low reading as a sign that one metal is cheap against the other. It has varied widely across decades, so any 'normal' level is a judgement, not a rule.

Platinum and palladium

These two metals are quoted as XPT/USD and XPD/USD. Both are used heavily in vehicle catalytic converters, with platinum mostly in diesel systems and palladium mostly in petrol ones, so their prices depend on car production and emissions rules. Mine supply is concentrated in a few countries, notably South Africa and Russia, so supply disruptions can move prices sharply. Both markets are much smaller than gold, and trading costs are usually higher.

Ways to get exposure

The distinction at the bottom row matters. Trading a metal CFD is not owning gold. You hold no bar and have no claim on any metal, only a contract whose value follows the quoted price, and you pay or receive financing for positions held overnight. That suits short-term trading and also adds costs for positions held for weeks.

Costs and trading hours

Spot metals trade from Sunday evening to Friday evening in most time zones, with a short daily break. Liquidity is deepest when London and New York overlap, and thinner in the Asian session. The cost of a trade is the spread, which is the gap between the buy and sell prices, plus overnight financing if you hold a leveraged position past the daily rollover. Gold spreads are usually tight in busy hours and wider around major announcements, so the same trade can cost more at one time of day than another.

A worked position-size example

Assume an account of 10,000 USD, a rule of risking 1% per trade, and a long idea in gold at 2,400 with a stop at 2,380, a distance of 20 dollars per ounce. The figures are invented and for illustration only.

If gold rises to a target of 2,440, the gain is 5 x 40 = 200 USD, which is two times the amount risked. If the stop is hit, the loss is about 100 USD. Note that the notional value of 12,000 USD is larger than the account, which shows why margin trading can magnify losses, and why the stop and the position size matter more than the margin figure. The risk per trade article explains the sizing rule, and leverage and margin covers what margin does.

Real fills can differ from the plan. Metals can gap over weekends or around major news, and a stop order is not a guaranteed price: in a fast market it can fill beyond the level you set. Spreads also widen when liquidity thins, such as during the quiet hours between the New York close and the Asian open.

A simple way to prepare

1. Know the contract: lot size, tick value, margin rate, financing charge and trading hours on your platform.
2. Check the calendar for central bank meetings and US inflation and jobs data, which move rate expectations.
3. Look at the dollar and at real yields, since gold often trades in relation to them.
4. Mark the levels on the chart where you would be wrong, and size the position from that distance.
5. Decide in advance how long you intend to hold, because financing costs build with time.

Precious metals can be volatile, and losses on leveraged positions can exceed what you expected. Nothing in a single article predicts where a price will go, and gold in particular has had long periods of both strong gains and multi-year declines.

Sources: LBMA (LBMA Gold Price and troy ounce), CME Group (COMEX gold and silver contract specifications), World Gold Council (central bank demand data), The Silver Institute (World Silver Survey). Next in the series: How to Trade Crude Oil: WTI, Brent, OPEC and Inventories