CFDs: the traders choice for playing the Gold market

Some say it's a store of value. To others, it’s a hedge against central bank largess and currency debasement that's taken place in the past decade or so. Others see Gold as a portfolio diversifier, as its price characteristics reduce variance in a broader portfolio.

Investors can gain exposure to these investment factors through ETF’s, Gold futures, Gold stocks, optionality, and for those with a long-term focus, physical Gold also offers a solution.

Gold is a derivate of the US bond market

Essentially, Gold is a derivative of the US bond market and the USD – typically when bond yields are going up, tend to see the USD rallying in appreciation and in this backdrop Gold is often sold. The opposite is true when bond yields fall. Gold has no yield, so when the relative returns (quantified by the yield) on offer in the bond market are increasing the relative appeal of Gold decreases and vice versa.

This fundamental backdrop can be quite complicated for retail investors to stay across because it requires a vigil on inflation-adjusted (‘real’) US Treasury yields and Gold’s ever-changing statistical relationship with the USD.

What really drives gold?

Is Gold an inflation hedge and if so, how hot does inflation have to be to really require such a hedge against price pressures? Or, as has been the case in the past decade, has it been a better hedge against central bank balance sheet expansion and specifically in a disinflationary environment?

For traders, the idea of trying to truly understand these shenanigans and what drives Gold on any given day and the challenging investment case does not matter. To traders, it’s about reacting to flows and changing behaviours in the market. So while the investment community are scratching around trying to make sense of the Gold market, traders simply try and profit from the aggregation of these investment flows and trade price action.

They trade trends, momentum, swings, reversals and mean reversion, and will do so on varying timeframes. Trying to profit from ever-changing market conditions and changes in volatility and movement – not necessarily prophesying, but reacting to moves and reducing or exiting positions quickly if the trade isn’t working.

It's about extracting the most out of a profitable position and looking at one’s risk-to-reward trade-off.

And, at the heart of everything, it's refining a trading process that gives a trader a slight edge and a positive expectancy.

CFDs help traders capture two-way opportunity

Contracts for Difference (CFDs) are an established vehicle in the trading eco-system, specifically appealing for traders wanting to trade two-way moves in price.

The overriding differentiator is that CFDs utilise leverage – this means that instead of putting down the full-face value for a position the trader puts down a percentage as a deposit, or ‘margin’.

Trading on leverage does carry additional risk, but it means your capital can work harder and for traders’ risk is a construct of potential reward. Along with achieving correct position sizing, managing risk is also our primary responsibility within our trading process. See Pepperstone advanced range of risk management tools on MT4/5 and cTrader.

CFDs also give traders the ability to:

• Increase the flexibility - Go long or short and profit from any market condition or volatility environment
• Pepperstone offers the cheapest vehicle to express a view on Gold - Trade from as little as 0.05 pips in some of the best liquidity environments of any broker – this appeals not just to larger size traders, but also higher frequency traders
• Choose a timeframe that suits a specific strategy - Trade short-term moves in the underlying price of Gold, 24 hours a day – 5 days a week
• Trade currency effect - Trade gold denominated in AUD, GBP, EUR, CHF, and JPY, as well as the USD – the idea is to buy Gold in the weakest currency or go short (to potentially profit from a move lower in price) in the strongest of these currencies
• Automate trading – take the emotion out of your trading using or developing an Expert Advisor.
• Back test a strategy – use Pepperstone’s Trading Simulator to conceptualise the effectiveness of any trading strategy and refine your edge

With Gold volatility picking up again and as traders try and understand how markets fare as the Federal Reserve and other major central banks look to normalise policy and reduce liquidity, Gold volatility will be a prevalent theme. Gold CFDs could offer new opportunity to potentially profit from the Gold market.