Differences Between Forex and the Gold Trade

For some who are new to forex, it’s natural to wonder how it relates to the gold trade. Currencies and gold both exist outside of the ordinary stock market and represent more direct representations of wealth than, say, stocks or bonds.

Based on these basic similarities, the association between the two makes sense. At the same time, however, it’s important for new forex traders to understand that the two markets differ significantly. Experience in or understanding of the gold market does not necessarily prepare a trader to handle forex. To emphasize this point, we thought we’d outline some of the key differences here.

Trading vs. Investing

The trading versus investing conversation is always an interesting one, because there is some overlap between the two. But comparing forex and gold markets actually helps to illustrate the differences quite nicely. Basically, trading involves buying and selling assets over short periods of time (hours or days, typically) in order to capitalize on shifting values. This is how most approach the forex market, in which incremental changes in currency value can have significant effects. Investing, on the other hand, typically means holding positions over a longer period of time — which is how many look to gain from gold’s presumed long-term, upward trajectory.

What Moves the Markets

As is true of virtually any comparison between two financial markets, currency and gold are also moved by different factors. We touched on what moves forex in another article, identifying factors like global trade numbers, macroeconomic statistics, and geopolitical changes. These factors can influence gold as well, but gold — somewhat ironically — also moves according to trends in currency. Movement in major world economies, currencies, and stock markets often determine the short-term direction of gold. Ultimately then, while there is some crossover, investors in these markets will be looking for different indicators.

The ETF Factor

While many in the gold market buy and sell actual quantities of gold bullion through online brokers, gold ETFs also play a substantial role. These are basically funds that represent collections of assets (such as mining company stocks) that move in conjunction with the gold price. Some investors prefer them essentially for the sake of simplicity. Where forex is concerned however, the vast majority of trading concerns the buying and selling of currency pairs. There are currency ETFs, as well as a few other alternative methods of trading in forex. But it’s largely a more direct practice.

Leverage

This is a simple point, but also represents one of the most significant differences between the two markets. In forex, traders get used to trading with large amounts of leverage — basically meaning they can trade with more money than they’ve actually deposited with brokers, and thus enjoy more potential for gains. This is simply not part of the gold trade in the same way.

Intent

There are also differences in the intent of traders in both markets. Forex traders are looking to make money in the short term, and often approach the practice essentially as a day job. By contrast, investing in gold is about taking advantage of its long-standing value and stability. People buy gold to hold onto it as a protection against economic downturns and in the hope that it continues to gradually gain value over the years, or even decades. One market is about leveraging day-to-day volatility to earn immediate income; one is about long-term protection and growth.

In the end these two markets are quite different. It makes sense to relate them to one another because of the general similarities noted above. But one should not enter forex or the gold trade expecting it to work like the other.

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