Bullion CFDs and Forex CFDs: The Connection

If you are an Australian and in any way connected with the financial markets you cannot afford to ignore gold. And if you are a forex trader, bullion CFDs provide you an excellent hedging opportunity.

Australia is one of the biggest producers and exporters of gold and its financial markets are greatly affected by the price of gold. For many years now, the currency pair AUD/USD has been moving in tandem with the price of gold, which is also the underlying reference asset for bullion (gold) CFDs.

CFDs refer to contract for difference that allows investors to take advantage of fluctuations in price without actually owning an asset. As such, when you create positions in bullion CFDs, you do not actually own physical gold or silver but only the right to make a profit or loss when the price gold or silver moves favourably. As an investor you must know certain basic aspects that relate to the positions you take in bullion CFDs.

Gold and silver bullion CFDs have a strong connection with Forex CFDs because the trading position you take reflects your view on the price of the metal in relation to currency value. While most CFDs are related to the underlying reference instrument or asset, gold CFD mean that you are taking a view on the price of gold as well as the currency it deals against. If you create a long position in gold you are expecting the price of gold to go up. It automatically means that you are short on the US dollar. Similarly, short positions in gold CFDs mean that you are going long on USD.  

CFD Position: Vital Information

Just as in any other form of trading, you open a CFD position on the basis of whether you expect the price to move up or fall. Whereas in other forms of trading you buy when you have the capacity to pay the full price and sell only if you already own a product, you can open a buy or sell CFD position simply by meeting the margin requirement applicable to the CFD position. 

A CFD position may be opened with a buy order or a sell order. However, if you close a CFD position, it must be equal and opposite of the open order. Multiple open CFD positions can be closed with one single order.

The most important aspect of opening a CFD position is margin money that you are required to pay. Since you do not pay full contract value, the CFD provider requires you to pay a percentage as security to its exposure to the risk as the counterparty to the contract.

Margin requirements tend to vary and depend upon two major factors:

-          Market volatility: There can be extremely sharp price movements in times of volatility, which increases the product provider’s risk to a CFD position.

-          Internal risk management: Every CFD provider has a risk management policy. The basis of such policies is usually its overall risk exposure taking into account the sum of all CFD positions opened with it.

Margin requirements are at the sole discretion of the product provider and tend to vary. Regardless of the margin money you pay on the CFD position you open, you need to be always prepared to pay the total contract value of your CFD position/s. Failure to meet margin requirements or full contract value in periods of very high volatility may mean termination of your CFD position/s.