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Is Gold the Next Major Currency?

22 Years ago | February 04, 2014 1/28/23, 12:00 AM

I would like to start this article by saying I follow but do not trade spot gold. As a U.S. resident, I am not permitted to trade spot gold and have to use the futures market to trade it. So, it came as a bit of a surprise to see how the spot gold market has grown. I first noticed it last year by the increasing number of spot gold trading posts on the Global-View Forex Forum. Interest in spot gold reached the point where we started a separate Gold Trading Forum (see www.global-view.com).

This got me to thinking whether gold is being treated like a commodity or a currency. It is not a simple answer as the price of gold seems to be a product of demand for physical gold, paper gold (e.g. ETFs), futures trading and margin spot trading. The focus of this article is on spot gold trading and why it seems to be closer to a currency than a commodity.

Before I continue, the objective of this article is not to compare the merits of futures vs. spot gold trading but rather look into why the latter appears to be gaining interest, which makes it more like a currency than a commodity in the way it is traded. One reason may be the way spot gold is treated by online forex brokers. Gold is treated like a currency with each individual broker determining what parameters it offers in terms of the bid-offered spread, leverage and minimum and maximum size traded. This may be one of the attractions for the spot trader, who can determine what leverage and size to trade. While I am not a proponent of high leverage (we have seen leverage as high as 400:1 = 0.25%), especially in a “currency” that is as volatile as gold, the flexibility offered by margin brokers may be one reason why interest in spot gold trading has increased.

By contrast gold futures have fixed contract sizes although mini contracts are available that allow smaller minimums to be traded. Margins are fixed and higher than spot gold but can be increased during times of volatility. Commissions are charged rather than being built into the spread. A standard contract size is 100 oz, mini contract 33 oz and micro contact 10 oz. spreads and liquidity are said to be poor on the micro contract. The following are margin requirements from a futures broker for a standard contract (mini is 1/3 and micro 1/10)

Type of margin

Margin

% margin gold $1,333 per oz

Intraday initial

$7,000

5.3%

Intraday maintenance

$5,600

4.2%

Overnight initial

$10,000

7.5%

Overnight maintenance

$8,000

6.0%

 

So is gold evolving to be the next major currency along with the USD, EUR, JPY, GBP, CAD, AUD and NZD? It appears to be moving in this direction the way online forex brokers are treating it and this is encouraging online traders to trade it like a currency. However, others trade it as a store of value and a hedge against inflation (which has not worked out this year) or as a commodity. So while some may say gold is becoming the 8th major currency and may are trading it as such, the jury is out as to how far in this direction it has moved. Perhaps, if gold/fx crosses (e.g. EURGLD, JPYGLD, etc) increase in popularity, then we can say it is the 8thmajor currency. In the meantime, suffice it to say gold is trading somewhere between a currency and commodity but for thjis trading spot gold, it is trading miore like a currency.

 

Jay Meisler

Founder, Global Traders Association and co-founder Global-View.com

 

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