Gold is one of the most highly-sought after precious metals in the world. It is used in jewelry, electronics, and coinage. Gold is widely considered to be an effective hedge against inflation, which means that when the dollar depreciates, demand for gold increases. In addition, during times of economic and political uncertainty, the demand for Gold rises due to its high intrinsic value and relative stability.

Gold is often purchased to hedge against inflation risk. Because inflation makes the returns on securities such as US Bonds less valuable, Gold is purchased instead. Because Gold is a real good, inflation will only cause the price of Gold to rise. So, while a rise in prices will make investments less profitable, gold maintains its value. Thus, during times of high inflation, Gold prices also rise.

In the past, China and India have purchased US Securities and held US Dollars in Reserves. For China, this has helped to maintain a devalued currency and keep exports high since they are relatively less expensive.

However, due to large US deficits many countries, China and India in particular, have begun to reconsider diversifying their reserves to protect themselves from a devaluation of the US Dollar. In November 2009, the Indian Central Bank announced that it would purchase $6.7B worth of Gold to diversify its reserves. China, which is the single largest purchaser of US Securities, has similarly increased its reserves of gold by 76% since 2003 and has hinted at further purchases. The decision of these large countries to shift increasingly towards Gold and away from US Dollar denominated assets will further increase the price. As Central Banks and Governments move to purchase Gold for reserves and to store their excess income from trade, Gold Prices will continue to rise.

Contract Size

Contract Size: 100 troy ounce (1 troy ounce = 31.1034768 grams)

Trading Example

Assume an investor buys two Gold contracts at 1388.50 and settles the two contracts by selling them at 1394.35, then the trading shall be calculated as below:

Trading = (selling rate – buying rate) x contract size x units

= US$ (1394.35 – 1388.50) x 100 x 2

= US$ 1,170


The illustration does not include commission and premium/discount

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