For some who are new to foreign exchange, it is natural to wonder how it relates to the gold trade. Currencies and gold exist outside the ordinary stock market and represent more direct representations of wealth than, for example, stocks or bonds.
Based on these basic similarities, the association between the two makes sense. At the same time, however, it is important for new currency traders to understand that the two markets differ significantly. The experience or understanding of the gold market does not necessarily prepare a trader to handle currencies. To emphasize this point, we thought we would outline some of the key differences here.
Trade Vs. Investment
The negotiation versus investment conversation is always interesting, because there is a certain overlap between the two. But comparing the foreign exchange and gold markets, in fact, helps to illustrate the differences very well. Basically, trading involves buying and selling assets in short periods of time (hours or days, usually) to take advantage of changing values. This brings the majority closer to the foreign exchange market, in which incremental changes in the value of the currency can have significant effects. Investing, on the other hand, usually means holding positions for a longer period of time, which is the amount you seem to earn from the alleged long-term upward trajectory of gold.
What moves the markets
As is true in virtually any comparison between two financial markets, currency and gold also move by different factors. We discussed what drives forex in another article, identifying factors such as world trade numbers, macroeconomic statistics, and geopolitical changes. These factors can also influence gold, but gold, somewhat ironically, also moves according to currency trends. The movement into the world’s major economies, currencies and stock markets often determines the short-term direction of gold. Ultimately, although there is some crossover, investors in these markets will look for different indicators.
The ETF factor
While many in the gold market buy and sell real quantities of gold bullion through online brokers, gold ETFs also play an important role. These are basically funds that represent collections of assets (such as shares of mining companies) that move in conjunction with the price of gold. Some investors prefer them basically for simplicity. However, when it comes to currencies, the vast majority of transactions involve buying and selling currency pairs. There they are Currency ETFs as well as some other alternative currency trading methods. But it is largely a more direct practice.
This is a simple point, but it also represents one of the most significant differences between the two markets. In currencies, traders tend to trade with large amounts of leverage, which basically means that they can trade with more money than they have actually earned from brokers and therefore enjoy greater profit potential. This is simply not part of the gold trade in the same way.
There are also differences in the intention of traders from both markets. Currency traders seek to make money in the short term and often approach the practice essentially as a daily job. Conversely, investing in gold is about taking advantage of its long-standing value and stability. People buy gold to keep it as protection against economic recessions and in the hope that it will continue to gain value gradually over the years, or even decades. A market tries to take advantage of day-to-day volatility for immediate income; one is about long-term protection and growth.
In the end, these two markets are quite different. It makes sense to relate them to each other because of the general similarities mentioned above. But one should not go into foreign exchange or the gold trade, waiting for it to work like the other.
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