Gold and silver have been traded on the commodities markets for hundreds – if not thousands – of years.
They are always in demand from manufacturers of jewelry, and increasingly for uses in the electronics and medical sectors.
They may also be traded as bullion or coin.
But although some investors may wish to hold metal as a hedge against inflation as part of a diversified portfolio, physical trade in gold and silver may be complicated by the need for security and brokerage fees.
However, it is also possible to speculate in the price movements of gold and silver without holding the asset yourself, using a derivative such as CFDs.
What moves the price of gold and silver?
The price of gold and silver is driven by a number of factors. Below, we look at several of the ways in which these markets are impacted.
Firstly, the prices of all commodities are driven by the forces of supply and demand.
A shortage of precious metals or an increased need for them makes them more valuable. For example, if political issues in a major silver producing region interrupts extraction, silver prices could increase over the short term.
A new extraction technique could have the opposite effect.
On the other side of the equation, increased demand for precious metals in electronics, such as gold used in mobile phones, could drive up prices.
Gold is the most dominant market in the precious metal sector, so its prices are naturally correlated with the other markets like silver. Silver and platinum are more likely to respond to gold price changes than vice versa.
But the price of gold and silver may also be driven by other factors.
Economic uncertainty can drive gold and silver prices
Gold and silver are often seen as safe havens, and the price may be driven up in times of economic uncertainty and political instability. Recessions and periods of high inflation have both seen increases in the price.
Industrial output may increase demand for gold and silver
Gold and silver have a huge range of industrial uses, including the manufacture of automotive parts, medical devices, electronics and jewelry. What’s more, new applications are continuously being developed. As demand for these goods grows, so does the demand for precious metals.
The strength of the dollar can affect gold and silver prices
The price of precious metals may be dominated by the dollar. When the dollar falls, gold and silver may be seen as a good place to store USD – meaning it is likely to push the price of precious metals higher
Quantitative easing and gold and silver prices
Gold and silver can seem more attractive in times of inflation. Quantitative easing – or money-printing – dilutes the value of currency. Precious metals are used as a hedge against inflation.
Trading gold and silver with CFDs
Many traders may trade gold and silver as commodities using CFDs, mainly because access to leverage means they can trade large positions with a relatively small deposit and amplify their profits, although there is also a risk of greater losses.
Commodity CFDs
Like options and futures, CFDs (Contracts for Difference) are another derivative that can be used to speculate on commodities.
A CFD is a contract between a trader and a broker. CFD traders may bet on the price moving up or downward. Traders who expect an upward movement in price will buy the CFD, while those who see the opposite downward movement will sell an opening position.
Should the buyer of a CFD see the asset's price rise, they will offer their holding for sale. At the end of the contract, the two parties exchange the difference between the price of the commodity at the time they entered into the contract, and the price of the commodity at the end. The net difference between the purchase price and the sale price is settled through the investor's brokerage account.
For example, if you opened a long (buy) CFD trade on gold when it was priced at $1,500, and you closed the trade after the price rose to $1,600, you would make a profit on the difference in the price of $100. If the price fell to $1,400, you would have made a loss of $100.
You also need to consider the costs of trading. The best way to understand CFD trading is to try it yourself with a demo account in a risk-free environment. By creating a demo account with us, you can gain access to our educational resources and support and risk-management tools, as well as news and analysis directly from our team.
You can take all the steps to start trading on price movements of commodities, such as choosing from a variety of instruments, buying or selling via order tickets, and implementing risk management techniques, without risking any losses.
It can be the simplest way to build your understanding of the market and confidence in taking a position, while you develop your familiarity with the factors that influence the market. When you are ready, you can take your account live.