Gold is one of the most traded commodity assets today. It is mostly available as a pairing with the US Dollar (XAU/USD), although pairings with the Euro and silver are becoming a staple on many trading platforms. Gold can be traded:
- On commodities exchanges as options instruments or gold futures.
- On forex platforms as a Contracts for Difference (CFD) asset.
- On binary options platforms as gold binary options.
There are differences between the trading of gold binary options and gold trading as CFDs or futures assets. We don’t need to dwell too much on the differences. However, we will introduce gold binary options so the reader can understand what they are all about.
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Binary Options & Gold
What makes gold a suitable candidate for binary options trading?
Gold trading on the commodities exchanges or even on the forex platforms as a CFD asset is a risky venture. Trading gold is actually more risky than trading currencies. Gold is an asset with a large range of movements. Many traders do not have well-funded accounts to handle the wide price swings that can occur when trading gold. This exposes them to even greater risk with a pretty good chance of blowing their trading accounts. For traders who do not have the financial muscle to fund trading accounts that can handle the basic trading requirements, investment in gold binary options is a safer alternative.
The contract requirements for gold trading on the commodity or CFD platforms place a hefty demand on traders. You need significantly more margin than in currency trading, as leverage rarely exceeds 1:20 (US platforms) or 1:50 (European platforms). How do you trade an asset that has the potential to move thousands of pips in a day, with leverage of 1:50 on a $2,000 account? This is a huge ask. It is much safer to buy or sell gold binary options as they require far less investment amounts and do not put hefty margin requirements on the trader.
Besides, the wide range of movements that gold exhibits means that trades that are direction-based will actually settle much faster than other slower-moving assets.
What Kind of Trades Can Be Performed on Gold Binary Options?
- Up/Down trades can be performed on gold binary options. Binary options gold trading using the Up/Down option aims to follow the upward/downward movement of the gold asset. The fact that gold displays such large movements when it is on fire means that the Up/Down option (Buy/Sell on American-style platforms) can be used to trade gold binary options.
- Boundary trades can be hard to pull off with gold, especially if you are betting on the IN option. Gold does display periods of range bound movement, but this is a lot harder to predict than with currencies. The reason is because gold does not have a specific news calendar which can be used to gauge periods of calm before the storm of market moving news comes along.
Be careful when using binary robots to trade gold binary options. Most of the robots out there are not primed to trade gold, so it is hard to really recommend trading gold with robots.
What Moves Gold Prices?
There is no specific economic news for gold, which is in contrast to currencies that have a defined economic news calendar. Gold prices mostly respond to the state of other financial markets. When there is market turmoil or global economic uncertainty, there is a higher demand for gold. Gold is a safe haven asset and the increased demand for gold during periods of economic uncertainty usually leads to higher gold prices. When markets assume a risk-on sentiment with investors and traders looking to capitalize on better conditions in the financial markets, the demand for gold cools off and gold prices drop.
Here is a list of specific factors that affect gold prices. Traders of gold binary options must take note of the influence that these factors will have on the price of gold on their binary options platforms.
- Global demand for jewellery.
- Political factors (e.g. governments increasing or reducing their gold stockpiles).
- Involvement of central banks in the gold market.
- Speculative activity by traders in response to economic situations.
- Mining companies (production outputs)
The demand for jewellery, especially in emerging market economies where the middle class and the millionaires club is swelling annually, accounts for close to 33% of global gold demand. In many countries, gold jewellery is purchased and used in occasional cultural ceremonies, after which they are stored away and may be exchanged for cash during periods of liquidity squeeze.
Political factors may also come to play. Some countries may decide to increase or reduce their gold reserves as part of strategic economic policies. This is intertwined with the activities of central banks. The central bank of any country is the agency of government that implements any decision to adjust the gold reserves of a country. Central banks across the world usually put a cap on the amount of gold that they can hold or dispose of at a time.
The impact of any changes in production outputs by mining companies in the major gold producing companies of the world are key influences on gold prices. They may not account for intraday changes in gold prices, but any factors that cause radical shifts in production of gold will impact prices in a sustained fashion. An instance is the South African gold miners’ strike some years ago, which limited gold production and sent gold prices soaring.
As has been mentioned earlier, investors will shift attention to gold when a risk-off sentiment pervades the global financial markets. Gold is a store of value and is therefore seen as a safe haven investment which promotes capital preservation. Global economic conditions usually determine gold prices to a large extent.
How to Trade Gold with Binary Options
In order to trade binary options gold contracts effectively, it is essential to time your trade entries and set your expiry times appropriately. This is where technical analysis comes in. You can analyse your gold prices using various tools of technical analysis such as candlesticks, patterns and technical indicators.
There are no candlestick or indicator charts on binary options platforms. Therefore, your technical analysis on gold binary options will have to be done using external chart packages. The MT4 platform provides you with free charts to do this. A forex broker’s demo platform containing the gold commodity asset can be downloaded online, and other tools such as custom indicators and EAs can be added to enhance the analysis.
Once you have your tools ready, select a regulated binary options broker that offers gold binary options. Open a binary options account by filling the online account opening form and fund the account with adequate trading capital.
Gold is traded at specific times of the day, which coincides with when gold is traded on the Chicago Board of Options Exchange platform is open for gold trading. The trading times for gold are as follows:
8:20 AM – 1:30 PM
6:00 PM to 5:15 PM (Next day)
6:00 PM (Sunday/Open)
As a trader of gold binary options, you need to be aware of when the gold asset will be available for trading, and when the price of gold experiences its major price movements.
Trading gold binary options requires a safe and secure environment, free of bad robots which reek of fraud. You also need to put all the information in this article together and practice thoroughly on a demo account before you start trading with real money.
Q: Do I own actual gold when trading gold binary options?
Answer: You do not own actual gold when trading gold as binary options. Rather you are speculating on the price movement of gold. e.g Will the price move up or down by the expiry time. You’d need a pretty big warehouse to hold that much gold!
Q: How much money do I need to buy gold binary options?
Answer: Most binary options brokers will allow you to open trades on gold binary options with as little as $10. You do not need the large amounts required to trade gold on the parent commodity exchanges.
Q: Can I trade gold binary options with robots?
Answer: It is possible to trade gold binary options with robots if the robot has been optimized to do so by the software creators. Find out from your software vendor if this is the case.