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Trading on metals is a great way to add a new dimension to a portfolio

TRADERS are opportunistic creatures with an innate desire to search out new areas ripe for profits. But it is easy to get stuck in a bit of a trading rut, however profitable a rut it may be. You have your favourite pairs, your preferred trading strategies and your choice of analysis. But traders should always be looking for new ways to profit from the markets, especially if they are doing it for a living. Plus, a new challenge is always good.<br /><br />Foreign exchange traders looking for diversification in the chaotic markets will be pleased to hear that two forex providers &ndash; Alpari UK and Forex.com &ndash; have recently started offering gold and silver. This was in response to demand and, according to Glenn Stevens, CEO of Forex.com, &ldquo;because it was a natural extension of the existing expertise in the platform.&rdquo;<br /><br /><strong>HIGHLY LIQUID</strong><br />But why is the precious metals market the logical extension of the currency trader&rsquo;s portfolio? There are two main reasons.<br /><br />Firstly, in terms of the trading mechanics, the two asset classes are very similar, says Saxo Bank London&rsquo;s CEO Albert Maasland. He says that the metals market is &ldquo;highly liquid and is traded on spot so lots of clients who primarily trade foreign exchange also trade gold and silver.&rdquo; In contrast, because crude oil is traded on futures, there is less demand from FX traders who are used to trading on spot.<br />Secondly, it is natural to exchange precious metals for dollars. Gold and silver are both quoted in dollars on exchanges and it has always been the case that you exchange a given number of dollars for a quantity of gold or silver. The correlations that exist between precious metals and the dollar in particular allow for both speculation and hedging. Historically, of course, the US dollar was supported by gold until the collapse of the Bretton Woods system in 1971. While the gold standard is ancient history, the correlations and trading psyche still remain to a certain extent &ndash; the events of the past year have derailed gold&rsquo;s traditionally strong negative correlation with the US dollar.<br /><br />Gold also has strong correlations with commodity currencies such as the South African rand, the Canadian dollar and the Australian dollar, simply because these countries are huge exporters of gold. When demand for gold rises, more needs to be purchased from these countries&rsquo; mines, increasing demand for their respective currencies.<br /><br />But while precious metals trading is a logical extension of the foreign exchange trader&rsquo;s portfolio, it does not mean it is all plain sailing for experienced currency speculators. You certainly have to be well-versed in the issues surrounding the dollar and the other commodity currencies, but trading gold and silver requires a whole new level of research. Factors affecting currencies tend to be financial, including capital flows, interest rates, bonds and yields. Gold and silver are far more dependent on the fundamentals of supply and demand so you need to keep on top of (for example) what major companies are doing, or discoveries of new deposits.<br /><br />And while the mechanics of trading may be similar, the margins tend to be higher in precious metals because of the relatively lower liquidity in the asset class. FX traders looking to move into metals crosses need to understand that their risk limits will have to be adjusted and the dynamics of the trade will need to be recalculated in terms of exposure and stops, says George Tchetvertakov, head of market research at Alpari UK.<br /><br /> <!--StartFragment--> <strong>LESS TRANSPARENT</strong><br />He also says that gold and silver can be even more volatile than the currency markets: gold can move by as much as $10-20 in one day, enough to destroy an inexperienced trader&rsquo;s account. This is particularly true at the moment when quantitative easing, which is another variable that can affect currencies in sudden and unexpected ways, is added into the mix<br /><br />Forex traders also need to get used to the less transparent nature of the precious metals market. While gold and silver are certainly much more transparent than, say, equities, they are not a patch on the extremely clear and honest foreign exchange market, where all information is known by investors. With gold and silver there could be news that traders haven&rsquo;t heard about, meaning that the price is subject to manipulation.<br /><br />Gold and silver certainly stand side by side with the currencies but it would be foolish to think that they stick to their correlations. It is also possible, once you are comfortable with the precious metals market, to carry out pairs trades between gold and silver &ndash; silver tends to follow the pattern of gold. You might do this if you thought that gold was temporarily overbought and silver undersold, in which case you would look to buy silver and sell gold to make the most the metals returning to their long-term trend.<br /><br />Looking to expand your portfolio and your range of choice is never a bad thing, especially in conditions of market volatility. Precious metals is the next step for forex traders looking for a change of scene and a positive change to their balance sheet.<br /><br /><br /><strong>GOLD WHAT INFLUENCES THE PRICE?</strong><br /><strong>Safe haven status</strong>: Demand for the yellow metal has surged over the past six months as investors have sought out safe haven assets. When markets are jittery and investors have lost their risk appetite, gold will tend to do well.<br /><br /><strong>Asian prosperity:</strong> Many countries in Asia still use gold jewellery as a store of wealth. Growing disposable incomes in China and India will boost demand for the commodity.<br /><br /><strong>Mining companies:</strong> Any announcement of new deposits or how gold miners are doing will affect the price of the yellow metal. Key companies include Randgold Resources, Barrick Gold and Rio Tinto.<br /><br /><strong>SILVER WHAT INFLUENCES THE PRICE?</strong><br /><strong>Industrial Uses:</strong> Silver is most commonly used today as an industrial commodity because of its strength, malleability and thermal conductivity among other useful properties.<br /><br /><strong>Health concerns:</strong> In a world where we are constantly bombarded by threats of pandemics, silver&rsquo;s antibacterial properties are becoming increasingly popular.<br /><br /><strong>Supply:</strong> Only 5 per cent of silver ever mined is reusable; most has been swallowed up in industrial production.<br /><strong><br />Where:</strong> The top silver producing countries are Peru, Mexico, China, Chile and Australia.<br />