Gold – Definition and Characteristics

Gold is a chemical element with the symbol Au, but from the finance point of view, it is a precious metal that has been used for coinage, jewelry, and many other "finance things" throughout the recent centuries. For example, pharaohs in Ancient Egypt or Ancient Rome were hoarding gold, and since then, it has been considered as the symbol of wealth and power. 

More recently, gold had been used as money, but since 1971, this is no longer the case as the so-called gold standard ceased to exist. Gold is relatively rare, and as of 2015, only 186,700 tonnes of this metal exist above ground.

But let's talk more about its importance in the current financial system.

As we already noted, gold has a chemical symbol of Au, but its usually quoted as XAUUSD, when you want to trade it. Why is that? The reason is straightforward. The letter X means that it is "exchangeable," so it's kinda an acronym for exchange or trading if you will.
As you are trading gold against the US dollar, the symbol of gold and the symbol of the US dollar were joined together, thus creating the financial instrument XAUUSD. If you wish to trade gold against the euro, the instrument will be XAUEUR; against the Japanese yen, it will be XAUJPY and so on.

In the trading world, gold is usually used as a hedge from inflation/currency devaluation. Moreover, traders tend to buy gold as a safe-haven asset. Thus, when there is turmoil in the financial markets, the bullion usually outperforms.
On the other hand, as gold doesn't have any passive income, such as yield or dividend, plus investors need to pay the cost of carry when holding gold, the precious metal tends to decline in the risk-on sentiment. In this case, traders prefer equities or bonds over gold.
 

Gold quotes and trading

 

As you can see from the picture above, the spread between the bid and ask price is circa 60 cents. The minimal volume to trade is 0.01 lot or a micro lot. In this case, you will be buying or selling one ounce of gold, as the full lot consists of 100 ounces. 

If you trade one ounce of gold, you will earn one USD for each USD gold moves. For example, if you buy one ounce of gold at 1,586 USD and the bullion shoots to 1,600 USD, you will earn 14 USD (1 x 14 USD). If you trade half a lot, i.e., 50 ounces, then you will make/lose 50 USD for each USD gold moves. For example, if you buy gold at 1,600 USD and the metal goes to 1,620 USD, your profit will be 1,000 USD (50 x 20 USD). The same logic applies to a short position, or for the calculation of a potential loss.

You can choose from market execution (you will buy or sell gold immediately at the current market price) or use pending orders (limit and stop orders). Additionally, you may open the trade without stop-loss or take-profit orders and add them later, or it is possible to enter them while opening the position.

Feel free to practice trading on our demo account.