Spread on spot Gold went wild recently. Here are the reasons why!
Retail traders, have you noticed spread on gold recently? Sure you are, I’ve noticed in one moment more then 80 (800 gold) pips, but in the last couple of days, the biggest spread in my broker were 40 (400 gold) pips. What’s going on now when everything was normal for weeks, even when the price was moving intraday up/down for more then 500 (5000 gold) pips!?
Here’s couple of reasons behind that wild spread:
● XAU liquidity in the futures market remains thin. One of the key drivers of the dislocation seems to be arising from the exchange for physical ‘basis’ – aka the cost to swap Futures into OTC (spot) XAU – is essentially closed. Many eFX LPs simply quote retail venues a spot price in XAU and then hedge into the Futures market. Essentially, LPs are taking a risk on the implied ‘basis’, skewing prices to try to attract flow that will reduce their risk.
● The USD funding squeeze has put significant pressure on LPs who are all generally short ‘basis’.
● Refineries in Switzerland have also shut down and physical delivery of Comex Gold has been made nearly impossible because of flight restrictions due to COVID 19 travel bans, making it harder to physically deliver bullion to cover shorts.
● Wider spreads and extreme volatility in currency markets, with the USD falling after the U.S. Federal Reserve announced an unprecedented scheme of credit support to help the United States economy whilst full lockdown is being implemented in several states across the nation.
● Other Reserve Banks around the world are moving to push massive amounts of liquidity into the market and volatility is spiking on the back of these news announcements.
So, how to trade spot gold like this, while on the other hand, it’s so tempting with this wild intraday moves, right!? Well, it’s not easy to trade spot gold in such a conditions, but it’s possible with SL placing at least 150 (1500 gold) pips away from the price. Other possibilitie is trading without SL, but using the lowest possible leverage in your position. If your capital will not be in danger for more then 2 to 3% in move like 150 (1500 gold) pips, you can trade withour SL as well.
Also, it is extremely important for retail traders to be fully aware of the underlying market conditions and plan their trading accordingly. As uncertainty grips the market, Liquidity Providers and Banks retreat. As a result of this, your stop orders may incur greater slippage and stop out levels may be significantly above or below where you expect to be executed. I hope this spread will returned to normal range soon, but you should be very careful until.
Few days ago, how quickly spread can change on spot gold:
Be careful and trade safe! 😉