Transaction Operations

Topic Cover |  Market, Deposit operations, Transaction

Being a financial asset, gold can yield revenue if lent. These operations are executed when it is necessary to attract a metal in the account or deposit it for a certain period of time. Gold deposit rates are usually lower than currency rates, which can be explained by high currency liquidity. Standard deposit periods are 1, 2, 3, 6 and 12 months, but they can be changed. Bank attracting precious metals within the framework of deposit contracts can use them for making profit during some time, for instance, financing gold mining or for arbitrage operations, etc. Owners of gold get income from invested gold and avoid expenses of storing a physical metal.

Forwards

Except for the operations mentioned above, other transactions can be executed on the world market. For instance, forward deals which provide for real metal delivery during more than two business days. Making such deal, a buyer ensures himself against gold price increases on the spot market in future. Insurance implies fixing the price which mutual settlement will be executed at. However such deal does not give the possibility to use more auspicious conjuncture. Forward cannot be cancelled. It can be only balanced (forward position is closed) by buying and selling of the stipulated by the deal amount of metal at the current price with future selling it at price the stipulated by the forward contract. Such transactions are made frequently on the interbank gold market. If selling a metal for exact period is necessary, a seller works it off under conditions of spot and then makes a swap deal: he buys a metal on conditions of spot and sells it on conditions of forward at the same time.

Transactions with CFDs

We were considering physical metal markets’ organization and functioning before. However, tehre is another point of trading virtual instruments that arouses interest.

There are hardly any events that had such influence on the financial markets as CFD introduction.

The era of unprecedented interest and exchange rates started in the 1970-ies and gave rise to the need for new financial instruments which could be used for managing increased risks. Prosperity of derivative financial instruments industry is connected with its possibility of fast and effective reacting to changing market tendencies. Eventually, a virtual section of the gold market became an independent field with huge turnover which was many times bigger than that of the physical market.

Future (futures contract) is a legal contract binding the parties; one party agrees to execute and the other – to accept delivery of goods in certain amount (and of ertain quality) at a definite time in future at the price set while contract concluding. In world practice, gold futures contracts are traded on several stock exchanges, and the biggest amount of gold contracts is concluded on COMEX in

 New York. Operations with gold have been executed since 1974 there. The main aims of futures
operations are hedging and speculation. Such deals are especially attractive as you do not need to have much money or many goods. Small investments can bring much profit provided the conditions are suitable.

Another popular form of fixed-term contracts is gold options introduced in 1976 and widely spread in 1982 after their execution in the USA.

Option is a fixed — term contract. The client can either buy a call option or sell a put option of a certain standard amount of goods at a fixed price on the exact date (European options) or during the whole specified period of time (American options). The seller of the option sells the right to the counterpart to execute the transaction or cancel the deal. The buyer of the option pays for this right to the seller – option money. The buyer has the right to exercise the option at a fixed price. Therefore, the active party in transactions with the options is the buyer, because this person makes a decision on fulfillment of conditions of the option contract.

Option transactions are often used for hedging. So, if the investor hedges against risks of increases in the gold price, he will be able to buy a call option or sell a put option; if the investor hedges against risks of decreases in prices, he will be able to sell a call option or buy a put option.Compared with other instruments of hedging, an option is attractive, because, besides fulfillment prices fixing to hedge against adverse changes in market conditions, it gives the opportunity to take advantage of favourable conditions. In addition, options promote development of speculative operations.

The maximum size of losses of the buyer is limited by the paid bonus, the gains are potentially unlimited. Consequently, the situation for the seller is vice versa.

Options can be involved in over – the – counter market. Such options are called dealer's options. Their main distinction is that they are not issued by an exchange, but an actual legal entity that guarantees the execution of the option

Gold Price Fluctuations

Topic Cover | Gold, Price, Fluctuations, Market

As a rule, the gold price depends on worldwide economic situation. Moreover, the gold price has always been an indicator of effectiveness or unprofitability of alternative investment instruments. Gold depreciated in the period of funds turnover and extensive use of different instruments of capital increase. On the contrary, in case of economic stagnation, downturn or recession, gold seemed to be the most stable and liquid instrument of capital fixation and its future saving.

The analogy can be drawn to the foreign exchange market: gold can be compared to the Swiss franc which is considered a safe-heaven asset to ride out high volatility.

In other words, when bulls are ruling the market, consumption is rising pulling all the economic sectors up, gold pales into insignificance. But it is temporary.... In August 1998 Russia was going through a tough period: treasury bills depreciation, oil crisis, and subsequent rouble devaluation hit everybody.

That time Russians trying to save their capital bought almost all gold at banks and did not regret it. Since August 1998 the price of one ounce has increased three times. Even though the 20% VAT was charged at that time, gold justified investor hopes. However, during that period individuals were able to buy gold only at Russian banks. Meanwhile, the price of one ounce formed on the internal market, and the price of gold was higher than on the world market due to a limited number of providers and high demand within Russia. Now there are possibilities for Russians regardless of crisis locality to buy gold on the world open market. It became possible not only because of financial and stock institutes’ development in Russia, but because numerous brokers appeared providing opportunities to enter the international markets.

As for the current crisis, it has fundamental features. It not only runs through the economic structure of different countries, but provokes recession as well. That is why buying gold is considered as one of the safest way of capital saving. Last year gold quotes surpassed the level of USD 1000. Prices of other precious metals are near the highs. First time for the last 30 years silver approached USD 21 for an ounce. Platinum and palladium rose in price up to USD 2,273 and USD 582 respectively.

However, later on prices of precious metals started declining, except for gold. Moreover, despite production downturn and persistent demand for gold among companies, gold hold steady at a high price due to its speculative and capital saving characteristics.

Other factors have influence upon the gold price. For example, the US dollar and the oil price. Meanwhile, the gold price movement is inversely related to the US Dollar and directly related to the oil price dynamics. It is explained by the fact that when the foreign exchange market volatility and the US Dollar rate are decreasing, gold appears to be an alternative investment harbour. While the price of an oil barrel is increasing, gold is the means of petrodollars accumulation.

Commodity Market

Topic Cover | Definition, Commodity, Market

A physical or virtual marketplace for buying, selling and trading raw or primary products. For investors' purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities.

Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.)
FXCM-IGINDEX explains 'Commodity Market

There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds, index funds or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract.

Forex Fair Warning

Topic Cover | Fair Warning, Forex, Exchange, Trading, Market

This tutorial is designed to help you develop a logical, intelligent approach to currency trading base on 10 key rules. The systems and ideas presented here stem from years of observation of price action in this market and provide high probability approaches to trading both trend and countertrend setups, but they are by no means a surefire guarantee of success. No trade setup is ever 100% accurate. That is why we show you failures as well as successes - so that you may learn and understand the profit possibilities, as well as the potential pitfalls of each idea that we present.

The 10 Rules

1.   Never Let a Winner Turn Into a Loser
2.   Logic Wins, Impulse Kills
3.   Never Risk More Than 2% per Trade
4.   Trigger Fundamentally, Enter and Exit Technically
5.   Always Pair Strong With Weak
6.   Being Right but Being Early Simply Means That You Are Wrong
7.   Know the Difference Between Scaling In and Adding to a Loser
8.   What is Mathematically Optimal Is Psychologically Impossible
9.   Risk Can Be Predetermined, but Reward Is Unpredictable
10. No Excuses, Ever

The Basics of the Foreign Exchange Market

Topic Cover | Basics, Forex, Exchange, Trading, Market


At the completion of this lesson, you should understand:
The characteristics of foreign exchange and how it differs from other financial markets.
The driving forces behind today's foreign exchange market activity.
How the advent of online foreign exchange trading on margin has benefited the individual trader.

Overview:

•  What is Foreign Exchange?
•  A Short History of the Foreign Exchange Trading Market
•  Trading Margin FX
•  Margin FX - The New Frontier
•  Summary

Exercises

Test Your Knowledge

What is Foreign Exchange?Foreign exchange consists of trading one type of currency for another. Unlike other financial markets, the FX market has no physical location and no central exchange. It operates "over the counter" through a global network of banks, corporations and individuals trading one currency for another. The FX market is the world's largest financial market, operating 24 hours a day with enormous amounts of money traded on a daily basis.

Unlike any other financial market, investors can respond to currency fluctuations caused by economic, political and social events at the time they occur, without having to wait for exchanges to open. Access to modern news services, charting services, 24- hour dealing desks and sophisticated online electronic trading platforms has seen speculation in the FX market explode, particularly for the individual trader.

The currency markets are not new. They've been around for as long as banks have been doing business. What is relatively new is the accessibility of these markets to the individual speculator, particularly the small- to medium-sized trader

A Short History of the Foreign Exchange Trading Market

Topic Cover | A Short History, Forex, Exchange, Trading, Market

Foreign exchange consists of trading one type of currency for another. Unlike other financial markets, the FX market has no physical location and no central exchange. It operates "over the counter" through a global network of banks, corporations and individuals trading one currency for another.

The FX market is the world's largest financial market, operating 24 hours a day with enormous amounts of money traded on a daily basis.

Unlike any other financial market, investors can respond to currency fluctuations caused by economic, political and social events at the time they occur, without having to wait for exchanges to open. Access to modern news services, charting services, 24- hour dealing desks and sophisticated online electronic trading platforms has seen speculation in the FX market explode, particularly for the individual trader.

The currency markets are not new. They've been around for as long as banks have been doing business. What is relatively new is the accessibility of these markets to the individual speculator, particularly the small- to medium-sized trader

Foreign exchange markets originally developed to facilitate crossborder trade conducted in different currencies by governments, companies and individuals. While these markets primarily existed to provide for the international movement of money and capital, even the earliest markets had speculators.

Today, an enormous proportion of FX market activity is being driven by speculation, arbitrage and professional dealing, in which currencies are traded like any other commodity.

Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted in large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971.

From 1944 until 1971, most of the world's major currencies were pegged to the US dollar under an arrangement called the Bretton Woods Agreement. Participating countries agreed to try and maintain the value of their currency with a narrow margin against the US dollar and a corresponding rate of gold, as needed. These countries were prohibited from devaluing their currencies to gain a foreign trade advantage. Consequently, the foreign exchange market was relatively static.