Getting Started In Bullion - The Introduction
Learn how the market works and essential aspects of bullion trading before you make your first trade.
Bullion Trading Fundamentals
1. Bullion margin requirementsIn bullion trading, the margin requirement refers to a good faith deposit for possible trading loss on opened positions. The margin allows traders to participate in leveraged trade, and hold positions greater than the margin deposit value. The margin level of gold is 0.5% of currency contract value (in USD), which is 200:1 leverage, the maximum allowed by Z.com Trade. The margin level of silver is 1% of currency contract value (in USD), which is 100:1 leverage, the maximum allowed by Z.com Trade.
2. SpreadsSpread refers to the difference between the sell and buy price of a two-way price quote.In bullion trading, the spread is the transaction cost for the investors. (Some brokers may apply charges on clients e.g. commission and service charges apart from spread).
For example, gold trading is now 1270.00/1270.50.
In this example of gold trading, a quote of sell price 1270.00 versus buy price 1270.50, (1270.50 ? 1270.50 = 0.5) 0.5 is the price spread.
3. Rollover interestIf investor holds position more than one trading day, they may earn or pay the rollover interest rate, which is based on the interest rate of the bullion they are trading.
4. Physical delivery vs. leveraged trading
Lot size: 100 ounce
Open price: 1,270.50
Funds required: USD 127,050
If price goes up to 1,290.5
Profit (in dollars): USD2,000
Rate of Return: 1.57%
Leveraged trading (e.g. 200:1 leverage)
Lot size: 100 ounce
Open price: 1,270.50
Funds required: USD 635.25
If price goes up to 1,290.5
Profit (in dollars): USD2,000
Rate of Return: 314.84%
1. Introduction to fundamental analysisFundamental analysis refers to the study of financial market and economic studies in attempt to predict the trend and value of bullion fluctuations. The studied materials may include economic figures, news, rates trends and governmental policies. Contrary to technical analysis, technical analysis focuses solely on market factors in bullion market trends when evaluating the price trends. In study of macroeconomics, it generally includes domestic and international economic indicators, such as Gross Domestic Product (GDP), inflation rate, interest rates etc., which may involve too much data and figures. It could lead to incomplete and uncertainties in data collection. Furthermore, news release so frequently and it takes time to investigate and gather up information. By the time the results are ready, it may have already outdated and deviated. Thus, it is necessary to combine the use of fundamental analysis and technical analysis.
2. U.S. Dollar IndexThe U.S. Dollar Index measures the relative strength of the U.S. dollar compared to a basket of foreign currencies, which consists of Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc. Among all these currencies, Euro is the most important and carries the largest weight, which is about 57.6% weighting in the index. Therefore, the monetary policy by the European Central Bank and the economic performance in the Eurozone are critical in determining the strength of the U.S. Dollar Index. When the Dollar Index appreciates, it means that the dollar is gaining strength compared to other currencies, and vice versa. Investors should be aware that this index does not include currencies like Australian dollar and New Zealand dollar in its weighting.
There are two major influences that the U.S. dollar brings to the bullion market. First, most of the commodities in the international market trade in terms of the U.S. dollar. Assuming that the underlying value of gold has not changed, the price of the gold will appreciate whenever the U.S dollar weakens. Second, both the U.S. dollar and gold are often seen as global reserve assets. Therefore, the price of gold and the dollar index exhibit negative correlation most of the time.
3. Economic indicators
Typically, non-farm payrolls indicates the conditions of the economy. When non-farm payrolls drops, it represents companies lower it's production and resulting a downturn in the economy. If non-farm payrolls stimulates, a healthy economy is expected and in theory it benefits the currency. Therefore, non-farm payrolls is an important indicator that influences the economy and the development of the financial market.
Moreover, the construction of new houses has a chain effect on other industries such as manufacturing, raw materials, mortgage sector etc. and boosts the entire economy. In theory, a country’s currency benefits when housing starts and building permits increase. When they drop unexpectedly, there will be a pressure on one country’s currency.
In general, the purchase of new house often involves mortgage, hence new home sales is affected directly by the mortgage rate. New home sales play a major role in the retail sector. It reflects the condition of the real estate market. When the consumption is strong in real estate properties, it reveals the economy is in a good shape and theoretically benefits a country’s currency. Furthermore, new home sales are positively related to the housing starts and building permits. If housing starts and building permits lower, new home sales are expected to be decreased.
In general, when a large and sustained and accelerated increase in the producer price index, the country's central bank reaction is to take the rate hike countermeasures to prevent the rapid rise in inflation, the increased possibility of the appreciation of the national currency.
In US, generally a monthly economic indicator is compiled and released by the Census Bureau and the Department of Commerce in United States. The report covers the previous month, and is released about two weeks after the month-end. The report also breaks down sales figures into groups such as food and beverages, clothing, and autos. The results are often presented two ways: with and without auto sales being counted, because their high sticker price can add extra volatility to the data.
The report is conducted through random sampling that includes the comments of consumers view on current and expected economy condition, employment rate and personal financial position. By comparison to the University of Michigan Consumer Confidence Index, the fluctuation of Index of Consumer Sentiment is relatively larger which indeed lowers the reliability.
Overall, the fundamental idea is that if the consumers are optimistic and rational, they will tend to purchase more goods and services. This increase in spending will inevitably stimulate the whole economy and may lead to a higher interest rate and benefits the currency.
Overall, orders for factory hard goods can provide information on how busy factories will be in the future. Orders placed in current months may provide work in factories for many months to come as they work to fill the orders. Rising durable goods orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates, which is usually supportive for a currency.
By monitoring the ISM Manufacturing Index, investors are able to better understand national economic conditions. When this index is increasing, investors can assume that the stock markets will go up because of higher corporate profits.
The strength of a nation's economy will have an impact on the value of its currency. Therefore, forex traders typically look at the initial claims figure as part of their analyses when assessing a currency's prospects for the immediate future. Generally speaking, week-by-week numbers are too volatile to get an accurate picture of economic changes, so four-week moving averages are typically used for the initial claims metric.
From 1948 to 2004, the monthly U.S. unemployment rate has ranged between about 2.5% to 10.8%, averaging approximately 5.6%. The unemployment rate is considered a lagging indicator, confirming but not foreshadowing long-term market trends. An unemployment rate equal or lower than 3.0% is considered "full employment" in U.S.
Researchers of University of Michigan use the raw survey data from 500-600 adults, and calculate the seasonal adjusted consumer confidence, current index and expected index. Researchers set the result of the first quarter of 1966 100 for the need of index calculation.
For a long time, the data is a valuable guideline for the change of consumer attitude, which can be used to predict consumer behaviour. In addition, compared with other data which serve similar purposes, this data has lower volatility and higher stability. There is close correlation between this index and consumer spending.
If this index rises, the bond market will be treated as bearish and bond price will fall; stock market will be treated as bullish. There is hint for the US dollar exchange rate from the Fed, if consumer confidence rise, consumption will grow, and economy will be stronger; then Fed will raise interest rates, and US dollar exchange rate will be stronger.
1. Introduction to technical analysisThe technical analysis is the study of financial markets in the past (the use of the chart) to predict the price trend and decided the use of investment strategies. In theory, technical analysis only considers the behaviour of the market or the real price of the financial instruments. By assumption, the premise to assume that its price will reflect all investors via other channels with all relevant factors studies.
The basic beliefs of the technical analysis are built on “History will repeat itself endlessly” and uses statistical datasets to predict the market moment. Technical analysis is widely used by traders and financial experts most of the time. Some researches state that the use of technical analysis is more extensive compared to fundamental analysis in the bullion market.