How to spread bet gold

published 20 July 2011

This week, the gold price hit a new peak of $1,600 an ounce. That's just over £1,000. Then it dipped a bit. So gold bugs are furiously debating where it will go next. I'll leave answering that question to our resident yellow metal guru Dominic Frisby. The one I want to deal with is how can a spread better play the next move?

The answer is - very easily. Many spread betting brokers now offer gold bets. Indeed, one of the biggest players IG index even has a G in its name that comes from the word gold. So, how does a bet work?

As usual with a spread bet, you'll be offered a 'two-way' price made up of a bid and an offer. So let's say that's 1,588.2 -1,588.7. You decide to place an upbet. The next decision is how big a bet you want to place the bet amount per point. In this market, the minimum price movement used to settle up profits and losses (the 'tick' or 'pip') is typically $0.1. So let's say you buy the spread at 1,588.7 for £5 per point.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Now you wait. Fortunately, you are right that gold is heading up and the price quickly breaks back above $1,600 so that the new quote from your broker is 1,601.2 1,601.7. You close your position at the new bid price of 1,601.2. The total profit in points is the difference between 1,601.2 and 1,588.7, or 12.5, which is 125 points given each point is $0.1. At £5 each that's a profit of £625, all tax free.

As you can see from this, your bet is pretty leveraged a small change in the gold price can trigger a big profit. Or loss. So put in stop loss orders (as a bull you'd put in an order to sell just below your initial buying price). This will make the bet a bit more expensive (it widens the bid to offer spread) but will stop losses racking up too fast. Also ask your broker about minimum bet sizes a bet at £2 per point does a lot less damage if it backfires than one at £10 per point.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

How to spread bet gold

Subscribe to MoneyWeek

Sign up to Money Morning

Useful links

Subscribe

MoneyWeek

Most Popular