Fundamentals gold trading and precious metals in general part 1

Gold and silver have always been perceived to be valuable, and were used as a form of currency long before paper money was introduced. Today, they are still hugely important to the global financial system, and are considered to be ‘safe haven’ stores of value in times of financial crisis.
From a forex trader’s perspective, precious metals can be an interesting and useful vehicle for diversification, and many platforms allow trading in them alongside currencies. In this series, we shall be taking a look at precious metals, how they work and how you can invest in them. Today, we’ll mainly be looking at the daddy of them all – gold.

1. Gold

As the most widely-traded precious metal, gold has a long history as a store of value. Among its distinguishing features, it doesn’t rust or corrode, can conduct heat and electricity very well, and is very malleable in its base state. Although it has some uses in industry, such as in electronics and dentistry, its main use is as a form of currency and a base for jewellery.
Like other currencies, the value of gold is determined by the market supply around the clock for most of the week. Unlike other commodities, fluctuations in the gold value are largely down to sentiment, rather than supply and demand. This is because most of the gold in the world has already been mined, so the supply rarely changes for that reason. The main thing that affects price is when the people and organisations that have gold decide to sell, the price drops, and when they want to buy, the price is driven higher.
There are several reasons why the desire to hoard gold can increase:

• Loss of faith in the financial system

When banks, and even money itself, are perceived to be unstable, or if there is some political instability, investors often flock to gold because it is seen as being a safer store of value than cash.

• Inflation

When the real rates of return from traditional investments such as equities, bonds, or real estate start to fall as a result of inflation, investors often put more of their money into gold in the belief that this will prove to maintain its value better in these conditions.

• War or Political Crises

In times of war and political upheaval, investors have always hoarded gold. There are many advantages to this – it can make an entire lifetime’s savings portable, and enable it to be stored until it needs to be traded for shelter, food, or safe passage to a neighbouring country.

2. Silver

While the value of gold very much depends on its status as a store of value in times of unrest or economic stress, the value of silver is tied just as much to its role as an industrial metal as it is to its status as a store of value.
So, although silver will often mirror the price action of gold, supply and demand factors can also affect its value. There are several recent events, for example, that have affected the level of demand for silver:
The advent of the digital camera has meant that the demand for silver-based photographic film has fallen through the floor.
The huge increase in demand for silver, used for connectors and bearings in consumer electronic devices, medical products, and industrial items from the emerging market economies in the East.
Silver’s use in batteries, superconductor applications and microcircuit markets.
It’s unclear whether (or to what extent) these developments will affect overall noninvestment demand for silver. One fact remains; silver’s price is affected by its applications and is not just used in fashion or as a store of value. (Find out how everyday items you use can affect your investments in Commodities That Move The Markets.)

3. Platinum

The third most traded precious metal after gold and silver, platinum is usually worth more than gold except in times of market and geopolitical instability, simply because it is much rarer. However, there are other factors that can affect the price of platinum, as it is like silver considered an industrial metal. The biggest demand for it is for the catalytic converters used to reduce emissions from cars. Aside from this, most of the rest of the demand for it comes from jewellery, while petrol and chemical refineries and the computer industry are responsible for the rest of the demand.

Due to the auto industry’s heavy reliance on platinum, auto sales and production numbers can be a big influence on prices, as are ‘clean air’ regulations that demand that all cars have to include catalytic converters as standard. Because most of the platinum mines are concentrated in Russia and South Africa, this creates the potential for OPEC-style price manipulation to support or even raise platinum prices.
However, demand for platinum has been reduced by the increased use of recycled catalytic converters, and also the increased use of palladium, which has similar properties and tends to be cheaper. For these reasons, platinum is the most volatile of the precious metals – and therefore one of the most interesting from a currency trading point of view.
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