Page 28 - Ultimate Guide to Currency Trading

Many of the inputs in the overall currency pair equation are absent in the gold currency pair
equation. When you evaluate an FX pair for a potential trade, you might consider each currency's
home-country economy, political climate, geopolitical problems, expected interest rate changes, as
well as technical indicators. Evaluate each input in relation to the other side of the currency pair. Gold
FX pairs, on the other hand, are missing half of the inputs that go into a usual trade evaluation. This is
because gold does not have a home country, interest rate, or even a meaningful control to its sup-ply.
Gold is the ultimate international currency, with its supply increasing only very minimally yearly.

The popularity of gold exchange-traded funds (ETFs) such as SPDR Gold Trust (GLD)
has increased the ability of the average investor to add gold to her portfolio. Gold
ETFs are claims on the physical gold that is held in the vaults of the ETF. Some gold
ETFs hold as much physical gold in their vaults as the treasuries of some small

countries!

On the other hand, the overall money supply of EUR, GBP, and USD is changing with each of
these countries' central bank management techniques. This is one of the reasons gold moves up and
down against these currencies. In other words, if the market believes that there will be an increase of
the number and supply of USD while the amount and supply of gold will remain constant, then gold
will gain in value relative to USD. This is because the market would be expecting the effect of the
increased number of dollars in the money supply to bid up the price of the limited gold supply. In
effect, the increased number of dollars would cause an inflationary effect on goods that are in limited
supply.

There are other elements that go into the price of the gold FX pairs. These include the
increase in the price of gold beyond the loss of the value of the USD, EUR, or GBP due to trading
demand. Other factors include news of major central bank gold purchases, and the anticipation of a
strong upcoming Asian holiday season.

You can study the technical indicators for Gold/USD the same way as you study the indicators
for other FX pairs. Information is readily available too: You can use the brokers' reports published by
full service brokers and consult the World Gold Council's website (www.gold.org).

Many forex trading firms such as Oanda (http://fxtrade.oanda.com) and Windsor Brokers
(www.windsorbrokers.biz) are set up to allow spot trading with Gold/USD on the same platform as
your regular currencies. Forex brokers such as these allow you to trade the metals with an adjustable
margin ratio from 10:1 up to 50:1. Units are small, usually around lots of 100 ounces; due to these
small-sized lots, an open position will move into and out of profit at a very slow, manageable rate.

Are Silver and Oil Like Currencies?

You might be wondering if other investment products can be traded like currency pairs. The
answer is yes, and the trading of spot silver and oil come to mind. Like gold, silver and oil are priced in