Gold Contracts, Leverage and Margin, Spread, Bid and Ask Price
Lots and Contracts
Gold Metal is traded using standard contracts also known as lots. One standard contract or standard lot of Gold is made of 100 ounces of Gold - 100 units of Gold.
The Gold contract is the size of the amount of Gold Ounces that are to be bought or sold in the online Gold trading market by a Gold Trader.
The standard Gold lot which is equal to 100 ounces multiplied by the current price of gold is not traded physically, but these one hundred ounces are represented by a contract.
These two terms, 1 standard lot and 1 standard contract can be used interchangeably because both refer to the same thing.
Why Trade Units of Gold of 100 Ounces
The reason why such large contracts are used to trade Gold or XAUUSD metal is so as to increase the value of a pip (profit).
The Gold price moves are measured in points also known as pips.
1 point of an ounce of gold represents 1 Cents only, therefore the price moves are calculated using very small price moves Gold, XAUUSD Metal will be quoted as 1247.01
The last digit is the pip - the second decimal point.
Now, to answer why Gold is traded in lots of 100 ounces, we shall use the example below to explain:
The XAUUSD metal will only move an average of just about $5 dollars per day, this is equal to 500 points or 500 pips, if one point is equal to 1 cents, then trading a single ounce of gold will only give profit of 500 points multiplied by 1 cent which is equal to only $5 dollars profit.
Gold Trade Example with 1 Contract:
In online Gold Trading, a trader will not trade a single ounce of Gold - Gold is traded in contracts of 100 ounces therefore in online trading a trader would be trading one contract which is 100 times the value of the ounce of Gold that has been used in the example above. Therefore, in the above example using on contract of gold to trade if gold moves $5 or 500 pips instead of a trader making only $5 dollars profit, the trader will multiply their profit by 100 because they will now be trading a contract worth 100 ounces of Gold, meaning the total profit would now get multiplied 100 times, and instead of making $5 dollars a trader would now make $500 dollars profit from this trade.
This is the reason why Gold is traded in contracts of 100 ounces - so as to increase the profit per point.
100 ounces of Gold - where each ounce is equal to $1247.00 according to the current Gold chart price at the time of writing, means 1 contract of Gold is equal to 100*1247 = $124,700.
This means to buy 1 contract of Gold at the current price a trader needs to have $124,700 dollars in their trading account. But how does a retail trader who does not have a lot of money to invest get this amount of money?
But How Can any Trader afford $124,700 to Invest With?
That is a very good question; the answer is LEVERAGE and MARGIN
In Online Gold trading, you do not need $124,700 Dollars to trade XAUUSD, with leverage and margin you only need $1,300 dollars to transact a contract of Gold, but how?
We shall explain using the example below:
Leverage and Margin
In Gold Trading a small deposit can control a much larger transaction and this is what is known as leveraging, an option which gives XAUUSD traders the ability to make nice profits and at the same time keep their risks to a minimum because they will only be using little of their money, A gold trader will trade Gold contracts on borrowed capital, therefore a trader having a deposit of $1,300 dollars only can borrow the rest using a leverage option such as the 100:1 leverage option - which means that the trader can borrow $100 dollars for every $1 dollar in their account, to put it in simpler terms, the trader can borrow 100 times what they have deposited.
Therefore a trader who only has $1,300 in their account can borrow up to 100 times their capital, therefore after borrowing, which is after using leverage the trader will now have $1,300 multiplied by 100 which is equal to $130,000 dollars. Now with the trader controlling $130,000 dollars they can then be able to trade the 1 contract of Gold.
Leverage is represented in the form of a ratio, for example 100:1 means that an online Gold trading broker will give a trader $100 dollars for every $1 that the trader has - that is the broker will give the trader the option to borrow 100 times the amount that they deposit. Leverage option of 200:1 also means the broker will give the trader an option to borrow 200 times the amount that they deposit in their trading account.
Margin - Margin is the amount of money required by your Gold broker so as to allow you to continue trading with the leveraged amount. Margin is also the amount that you deposit when opening your trading account. For example when you deposit $2,000 then your margin is $2,000.
With leverage it is possible for retail Gold traders or retail Gold investors to trade the online Gold market. Leverage option of 100:1 means that for every $1 dollar in your account you can borrow $100, this borrowed $100 dollars will be given to you by your online Gold trading broker.
What this also means is that the broker also requires you to maintain $1 dollar in your account for every $100 that they have provided you with.
Gold Contract Trading Example
If you deposit $1,300 in you trading account and your Gold trading broker gives you leverage of 100:1 then it means you now have $1,300*100 = $130,000 dollars that you can trade with and even buy up to 1 Gold contract.
Because the total amount that you now control is $130,000 and your money is $1,300 which is equal to 1% of the total, it means your margin requirement is 1%.
A Gold broker can tell you that their margin requirement is 1% which means that their leverage is 100:1, if your broker tells you their margin requirement is 2% it means their leverage is 50:1 (calculation $1 for every $50 is equal to 2%)
Therefore, with leverage and margin as explained above it means that retail Gold traders are not required to deposit all the cash for the whole contract that they are going to be trading with. The account they open they can trade on leverage and this account is referred to as a margin trading account - meaning they are trading on margin - the funds in their account is the margin for the leverage they will be using for trading.
The spread is the difference between the price at which you buy and the price at which the broker is offering to sell.
Spread can also be defined as the difference between the Bid Price and the Ask Price, the Bid Ask price shown below can be used to calculate the spreads for trading Gold, XAUUSD metal.
Gold Trading Spreads on MetaTrader 4 Gold Trading Platform
Example of How To Calculate Gold Spreads
The Bid ASK Price of Gold is 1247.11/1247.63
The spread is 1247.63 - 1247.11 = 0.52
Spread is 52 pips
This spread is the profit that the Gold broker makes.
Bid is the price at which you sell
Ask is the price at which you buy
If the quote for EURUSD is 1247.11/1247.63
Bid Price =1247.11
Ask Price =1247.63
Mini Lots and Micro Lots
As a note, there is also the fraction of 1 Lot in Gold trading, these fractions of the standard lot are provided by Gold brokers so as to make Gold more affordable to traders with minimum capital required being as little as $100 dollars.
The Fraction of a standard Gold contract are called Mini Lot which is 1/10 of a standard Gold contract and Micro Lot which is 1/100 of a Standard Gold contract.
Mini Lot = 10 Ounces of Gold
Micro Lot = 1 Ounce of Gold
These mini Gold trading lots were introduced to make the online spot Gold trading market more accessible to the retail Gold investor as well as attract more and more retail Gold investors. Maybe this is why online Gold trading has become very popular, even with as little as $100 dollars anyone can enter this market.