Getting Started In Bullion - The Introduction
Learn how the market works and essential aspects of bullion trading before you make your first trade.
- 1. Bullion margin requirements
In bullion trading, the margin requirement refers to a good faith deposit for possible trading loss on opened positions. The margin allows traders to participate in leveraged trade, and hold positions greater than the margin deposit value. The margin level of gold is 0.5% of currency contract value (in USD), which is 200:1 leverage, the maximum allowed by Z.com Trade. The margin level of silver is 1% of currency contract value (in USD), which is 100:1 leverage, the maximum allowed by Z.com Trade.
- 2. Spreads
Spread refers to the difference between the sell and buy price of a two-way price quote.In bullion trading, the spread is the transaction cost for the investors. (Some brokers may apply charges on clients e.g. commission and service charges apart from spread).
For example, gold trading is now 1270.00/1270.50.
In this example of gold trading, a quote of sell price 1270.00 versus buy price 1270.50, (1270.50 ? 1270.50 = 0.5) 0.5 is the price spread.
- 3. Rollover interest
- If investor holds position more than one trading day, they may earn or pay the rollover interest rate, which is based on the interest rate of the bullion they are trading.
- 4. Physical delivery vs. leveraged trading
- Physical delivery
Lot size: 100 ounce
Open price: 1,270.50
Funds required: USD 127,050
If price goes up to 1,290.5
Profit (in dollars): USD2,000
Rate of Return: 1.57%
- Leveraged trading (e.g. 200:1 leverage)
Lot size: 100 ounce
Open price: 1,270.50
Funds required: USD 635.25
If price goes up to 1,290.5
Profit (in dollars): USD2,000
Rate of Return: 314.84%
- 1. Introduction to fundamental analysis
- Fundamental analysis refers to the study of financial market and economic studies in attempt to predict the trend and value of bullion fluctuations. The studied materials may include economic figures, news, rates trends and governmental policies. Contrary to technical analysis, technical analysis focuses solely on market factors in bullion market trends when evaluating the price trends. In study of macroeconomics, it generally includes domestic and international economic indicators, such as Gross Domestic Product (GDP), inflation rate, interest rates etc., which may involve too much data and figures. It could lead to incomplete and uncertainties in data collection. Furthermore, news release so frequently and it takes time to investigate and gather up information. By the time the results are ready, it may have already outdated and deviated. Thus, it is necessary to combine the use of fundamental analysis and technical analysis.
- 2. U.S. Dollar Index
The U.S. Dollar Index measures the relative strength of the U.S. dollar compared to a basket of foreign currencies, which consists of Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc. Among all these currencies, Euro is the most important and carries the largest weight, which is about 57.6% weighting in the index. Therefore, the monetary policy by the European Central Bank and the economic performance in the Eurozone are critical in determining the strength of the U.S. Dollar Index. When the Dollar Index appreciates, it means that the dollar is gaining strength compared to other currencies, and vice versa. Investors should be aware that this index does not include currencies like Australian dollar and New Zealand dollar in its weighting.
There are two major influences that the U.S. dollar brings to the bullion market. First, most of the commodities in the international market trade in terms of the U.S. dollar. Assuming that the underlying value of gold has not changed, the price of the gold will appreciate whenever the U.S dollar weakens. Second, both the U.S. dollar and gold are often seen as global reserve assets. Therefore, the price of gold and the dollar index exhibit negative correlation most of the time.
- 3. Economic indicators
Non-farm payrolls represents the total number of paid U.S. workers of any business, excluding the following employees: general government employees, private household employees and employees of non-profit organizations. It generally occurs on the first Friday of the month.
Typically, non-farm payrolls indicates the conditions of the economy. When non-farm payrolls drops, it represents companies lower it's production and resulting a downturn in the economy. If non-farm payrolls stimulates, a healthy economy is expected and in theory it benefits the currency. Therefore, non-farm payrolls is an important indicator that influences the economy and the development of the financial market.
In US, "housing starts" separates into two kinds- single and group of houses. When single house is constructed, it is indexed to 1. For a group of house that contains 100 units, it is indexed to 100. Normally, experts place a higher weight on single house building because the units in group of house could be change in any time and leads to variability of the data. Housing starts and building permits have become relatively important nowadays in Western countries as it reflects the condition of the economy. Housing construction is recognized as an "investment". It helps to stimulate the economy since employment rate will increase when "Housing starts" increases.
Moreover, the construction of new houses has a chain effect on other industries such as manufacturing, raw materials, mortgage sector etc. and boosts the entire economy. In theory, a country’s currency benefits when housing starts and building permits increase. When they drop unexpectedly, there will be a pressure on one country’s currency.
An economic indicator that measures sales of newly built homes. A new home sale is considered to be any deposit or contract signing either in the year the house was built or the year after it was built. This indicator is released by the U.S. Department of Commerce's Census Bureau at the end of the month.
In general, the purchase of new house often involves mortgage, hence new home sales is affected directly by the mortgage rate. New home sales play a major role in the retail sector. It reflects the condition of the real estate market. When the consumption is strong in real estate properties, it reveals the economy is in a good shape and theoretically benefits a country’s currency. Furthermore, new home sales are positively related to the housing starts and building permits. If housing starts and building permits lower, new home sales are expected to be decreased.
Producer Price Index known as PPI measures the average change in selling prices received by domestic producers of goods and services over time. It is viewed as an indication of the inflation level. PPIs measure price change from the perspective of the seller. The PPI looks at three areas of production: industry-based, commodity-based, and stage-of-processing-based companies. In US, PPI is measured by the US Bureau of Labor Statics. Most of the data is collected through survey from producers in manufacturing, mining, and service industries with around 2300 types of commodities, afterward, it is compared against the basic index year which is 1967.
In general, when a large and sustained and accelerated increase in the producer price index, the country's central bank reaction is to take the rate hike countermeasures to prevent the rapid rise in inflation, the increased possibility of the appreciation of the national currency.
The retail sales report captures in-store sales as well as catalogue and other out-of-store sales. Retail sales report as a major indicator of the economy reflects the change of customers’ consumption level. In some developed Countries, retail sales become a big component of total gross domestic product (GDP). Higher retail sales may represent a better economy and results in higher interest rate, eventually benefits the value of the currency.
In US, generally a monthly economic indicator is compiled and released by the Census Bureau and the Department of Commerce in United States. The report covers the previous month, and is released about two weeks after the month-end. The report also breaks down sales figures into groups such as food and beverages, clothing, and autos. The results are often presented two ways: with and without auto sales being counted, because their high sticker price can add extra volatility to the data.
Index of Consumer Sentiment is known as the level of consumer’s confidence that measures the optimistic level of consumers to the economy in the near future.
The report is conducted through random sampling that includes the comments of consumers view on current and expected economy condition, employment rate and personal financial position. By comparison to the University of Michigan Consumer Confidence Index, the fluctuation of Index of Consumer Sentiment is relatively larger which indeed lowers the reliability.
Overall, the fundamental idea is that if the consumers are optimistic and rational, they will tend to purchase more goods and services. This increase in spending will inevitably stimulate the whole economy and may lead to a higher interest rate and benefits the currency.
Durable goods orders is a monthly economic indicator released by the Bureau of Census that reflects on new orders placed with domestic manufacturers for delivery of factory hard goods (durable goods) in the near future and the level of manufacturing activity.
Overall, orders for factory hard goods can provide information on how busy factories will be in the future. Orders placed in current months may provide work in factories for many months to come as they work to fill the orders. Rising durable goods orders are normally associated with stronger economic activity and can therefore lead to higher short-term interest rates, which is usually supportive for a currency.
An index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. It monitors the employment level, production inventories, new orders and supplier deliveries and based on these surveys, a composite diffusion index is created to illustrate the conditions in national manufacturing in United States.
By monitoring the ISM Manufacturing Index, investors are able to better understand national economic conditions. When this index is increasing, investors can assume that the stock markets will go up because of higher corporate profits.
A measure of the number of jobless claims filed by individuals seeking to receive state jobless benefits. This number is watched closely by financial analysts because it provides insight into the direction of the economy. Higher initial claims correlate with a weakening economy.
The strength of a nation's economy will have an impact on the value of its currency. Therefore, forex traders typically look at the initial claims figure as part of their analyses when assessing a currency's prospects for the immediate future. Generally speaking, week-by-week numbers are too volatile to get an accurate picture of economic changes, so four-week moving averages are typically used for the initial claims metric.
An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 represents expansion of the manufacturing sector, compared to the previous month. A reading under 50 represents a contraction, while a reading at 50 indicates no change. Prior to September 1, 2001, the acronym (PMI) stood for Purchasing Managers' Index. The Institute of Supply Management (ISM) now uses only the acronym, PMI. Although the ISM publishes several indexes, the PMI is the most widely followed and is sometimes referred to as the ISM index.
The percentage of the total labour force that is unemployed but actively seeking employment and willing to work.
From 1948 to 2004, the monthly U.S. unemployment rate has ranged between about 2.5% to 10.8%, averaging approximately 5.6%. The unemployment rate is considered a lagging indicator, confirming but not foreshadowing long-term market trends. An unemployment rate equal or lower than 3.0% is considered "full employment" in U.S.
University of Michigan Consumer Sentiment Index is a regular survey conducted by the researchers of University of Michigan on consumers about the assessment of personal financial status and national economic status.
Researchers of University of Michigan use the raw survey data from 500-600 adults, and calculate the seasonal adjusted consumer confidence, current index and expected index. Researchers set the result of the first quarter of 1966 100 for the need of index calculation.
For a long time, the data is a valuable guideline for the change of consumer attitude, which can be used to predict consumer behaviour. In addition, compared with other data which serve similar purposes, this data has lower volatility and higher stability. There is close correlation between this index and consumer spending.
If this index rises, the bond market will be treated as bearish and bond price will fall; stock market will be treated as bullish. There is hint for the US dollar exchange rate from the Fed, if consumer confidence rise, consumption will grow, and economy will be stronger; then Fed will raise interest rates, and US dollar exchange rate will be stronger.
- 1. Introduction to technical analysis
The technical analysis is the study of financial markets in the past (the use of the chart) to predict the price trend and decided the use of investment strategies. In theory, technical analysis only considers the behaviour of the market or the real price of the financial instruments. By assumption, the premise to assume that its price will reflect all investors via other channels with all relevant factors studies.
The basic beliefs of the technical analysis are built on “History will repeat itself endlessly” and uses statistical datasets to predict the market moment. Technical analysis is widely used by traders and financial experts most of the time. Some researches state that the use of technical analysis is more extensive compared to fundamental analysis in the bullion market.
- 2. Support line
- Support Line is considered as the level at which a lot of buyers tend to enter the market. Often referred to as the "support level". In the uptrend, a trend line is drawn through the lowest swing-points of the price move. Connecting at least two "lowest lows" will create a trend line. A trend line confirms its validity when the price respects this line. The more "lowest lows" the trend line contains, the more reliable it is. When the price drops down to the support level, there may be a pressure that prevent it for further decrease. Therefore, by investigating the support level, an optimal buy-in price could be found.
- 3. Resistance line
- In the uptrend, a trend lines is drawn through the highest swing-points of the price move. Connecting at least two "highest highs" will create a trend line. The more times that the price has tried unsuccessfully to break through the resistance level, the more formidable that area of resistance becomes. When the price increases up to the resistance level, there may be a pressure that prevent it for further increase. Generally, resistance level is viewed as a selling signal.
- 4. Uptrend
Describes the price movement of a financial asset when the overall direction is upward. A formal uptrend is when each successive peak and trough is higher than the ones found earlier in the trend. Notice how each successive peak and trough is located above the previous ones. There are buying signals at each trough. Plotting a trend line on a Bullion chart gives very valuable information. Not only the trend line will show a current trend of the price move, it will also depict points of support and resistance levels for market price. In addition, it will also help to determine good entry and exit points, best positioning for profit taking and placing protective stops. This is very simple but relatively powerful tool that will be viewed as one of the crucial indicators of possible trend reversal.
- 5. Downtrend
Describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend. Notice how each successive peak and trough is lower than the previous one.