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Investors Getting Started

Date: 2016-03-20

1. What preparations should be made before investing in precious metals? 

Personal gold investment has just started in China and most of investors feel strange to the gold investment. So it is required for gold investors to make intensive preliminary learning and preparations.  

(1) Preparation for investment portfolio

Gold is one of many different investment objects of a family. Different investment objectives, different requirements for risk control and different market situations will cause the changes of gold investment in the family’s investment portfolio. Besides, the degree of political security, economic security and social security as well as the regulation of gold control of the country where an investor is dwelled in are also the important coefficient of the proportion of investment in gold. Furthermore, the expected yield of return on other investments during some period will also influence the proportion of investment in gold. Because of China’s stable political status and rapid economic development, lots of investment vehicles can create relatively high yield. In this background, a family should not arrange too big proportion of investment in gold, in order to avoid the loss of other good investment opportunities and the increase of opportunity cost. For a common family, it is better for the gold investment to account for 5%-15% of its total family assets.

(2) Preparation for information

Because the gold price is influenced by many factors, and the trading in the gold markets globally is continuous around the clock, the investment in gold requires an investor to be acute about the information. Thanks to the rapid development of the information industry, individuals can obtain the gold-related information at a very low cost. At present, nearly all major international news agencies publish the gold-related information. China also has many information sources. In addition to the website of Shanghai Gold Exchange, many financial newspapers, magazines and websites publish relevant information.

(3) Preparation of simulated trading

Simulated trading can demonstrate the knowledge you have learned. If you are incapable of performing the trading, you will definitely pay a huge price to the actual floor trading. Therefore, having more simulated trading will reduce or mitigate the loss more or less. Strictly speaking, simulated trading is merely “paper talk” or practice stage, it cannot bring you unforgettable feeling and experience as that of actual trading. We often heard that many investors made the money in simulated trading, but the situation is the opposite during actual trading. So I doubt whether they do the real simulated trading? Do they record their simulated trading objectively and completely? Do they validate their trading theory and discipline during the simulated trading? Do they tolerate the loss too much because it is a simulation or make some self-comforting record by ignoring the loss?

Simulated trading is not easy to make money as we heard of. Many people forget or ignore the loss, but they keep the profit in mind. Therefore they get a fancy: Simulated trading will surely make the money. With such a fancy, many people dash to the market and speculate in the actual trading, but the results fall far short of their expectations. Investors shall be clear that the essence of simulated trading is to verify the knowledge they have learned, but not the simulated profit.

(4) Preparation for risks

Investors should know that precious metals, such as gold and silver, cannot generate the interests like deposits, or get the dividends like stocks. Moreover, the deferred trading of precious metals involves high risk. In addition to the risks of other trading products, like operational risk and emergencies, etc., risks of investing in precious metal also include:

1) Leverage risk. The margin management system allows the investors to enter the market at a low cost, investors will be able to make profit quickly in case of finding an accurate direction. However, the fund amplification function will amplify both the profit and the loss as well.

2) Risk of forced liquidation. Shanghai Gold Exchange and commercial banks eligible for precious metal agency business should make the settlement on each trading day. When an investor’s margin falls short of the specified proportion, the position of the investor will be forcedly liquidated. Particularly, the size of silver market inChinais relatively small and does not coincide with the international market. A small scale of funds may influence the price trend, and cause wider fluctuations and higher risk.

3) Deferred trading of precious metals in China has three trading periods. Although it has much longer trading period than the gold futures, still it far lags behind that of the all-day operation of the international market. The gold trading hours in the international market are the same as those of the foreign exchange trading, from 8:00a.m. (Beijing Time) on Monday to 4:00a.m on Saturday(Beijing Time). The gold price fluctuates continuously in the global market. Therefore, during the period of trading suspension in the domestic market, the international market price has probably changed a lot and incurred a huge risk of position. Especially for the “overnight position” on Friday, it faces higher risks since the Shanghai Gold Exchange has no night trading on Friday at present.

(5) Preparation for targets

Gold investments can be divided into short-term, medium-term and long-term investments according to the investment period; can be divided into value preservation and appreciation according to the requirements of profit obtaining; and can be divided into investment and speculation according to the operating methods. An investor can basically determine his/her targets of investment on the basis of price fluctuations of the gold market, fund available for the gold investment, familiarity with the gold market and his/her investment style. Those targets could not remain unchanged. The investor should continuously change them according to actual situations, so as to maximize the profit while controlling the risks.

(6) Knowledge reserve

Investors should know about basic knowledge about the gold, like the trading varieties and characteristics of the gold, pricing mechanism, the fluctuation relations between the gold price, US dollar and the international oil price. In addition, investors should master some basic means of investment in the gold, like basic situation of individual investment inChina, supply and demand relations, and how to analyze the gold price trend based on the economic data. 

2. What are the features and functions of the spot deferred trading?

Spot deferred trading of precious metals, Au(t+d), Ag (T+D) for short, is a kind of spot trading mode that is subject to the margin mechanism. The trader may either make the delivery on the day of signing the contract, or may extend the period of delivery, and can introduce the deferred compensation mechanism to balance the conflict between supply and demand. It offers the function of hedging and appreciation of the gold producers and users, and meets the investors' demand for profit.

Spot deferred trading is a new-type precious metals business launched by Shanghai Gold Exchange in 2004, highlighting such advantages as lower handling fee, little investment cost and sound liquidity, etc.

Features are as below:

(1) It can be made in the form of payment in installments.

The trader can perform the full-amount trading after paying 17% of the total trading amount as the margin. During the trading, regardless of the trading direction, the corresponding margin amount will be frozen and subject to the T+0.

(2) The time of delivery is optional.

A trader can make the delivery on the contracting day, or extend the time of delivery.

(3) It is subject to free quotation.

Customers can submit an entrusted order through the independent trading terminal, the online banking or the phone self-service voice system.

(4) Four types of quotation operation are available.

Buy open position, sell open position, buy close position & and selling close position correspond to the different types of fund freezing and increase & decrease in position holding, respectively.

Just like other investment varieties, deferred delivery trading of precious metals also hides high risk when it creates high yield. Therefore, investors should pay attention to control the investment risks when performing the trading. We should pay attention to three points: investors must make good preparations for market entry, in particular being familiar with the rules of deferred delivery; investors must be good at analyzing the precious metal market and master the gold price trend; and investors should be able to bearing certain risk, make the investment and treat the loss with a calm and normal attitude.

Functions are as below:

(1) Investment function

The launch of spot deferred trading of precious metals opens up a new channel for investment in precious metals, enabling the investors to gain a higher yield at relatively lower cost and promoting the circulation in the precious metal market.

(2) Function of hedging and appreciation of gold producers and users.

Deferred delivery keeps certain value of investment and provides gold procedures, users and investors with the function of hedging and appreciation, so it is also called the quasi-precious metal futures.

3. What is the investment fund management? What is its importance?

Fund management refers to the allocation of fund and includes: diversified arrangements and design of investment portfolios; how much fund should be allocated to each market; how to use the stop-loss order properly; how to measure reward-to-risk ratio; what measures should be taken after a successful trade or a failure one; and which kind of trading methods should be followed---conservative /prudential one  or proactive/ bold one.

For the investment fund management, investors should make clear the risk extent they are willing to and able to take, and the return of each investment. Therefore, an investor should address the following problems before he/she places an order:

(1) Making clear the risk extent he/she is willing to bear and when he/she should cut loss

An investor can fix the bottom line of loss and cut loss when reaching the bottom line. Rigorous self-discipline of risk management could make you be forced out of the market to control the risk. Most of the people treat the stop order with complex and conflicting feeling, because nobody is willing to make a deal with the bottom line price. But sometimes they are grateful for the timely stop order, especially when the logic controls the greed.

(2) Determining the time to initiate the trading and to take profits

Because the gold has both “goods attribute” and “monetary attribute”, so the gold price will be affected by four different levels of factors, i.e., international economy, international financial, international geopolitics and capital market. Because those factors stay at different levels, the extent and period of their influence on the gold price are also different, which will makes the fund management under different investment modes different. Knowing about those differences is of great importance for investors to setting the targets of fund management and realizing the expected investment yield.

(3) Attaching high importance to the fluctuations in the gold price caused by the linkage of financial market

The capital liquidity caused by the linkage of financial market could always trigger 5% fluctuations of the gold price, which could easily cause the loss of margin for the five-times deferred investment leverage of precious metals. Hence, during the short-term investment, investors should focus on controlling the proportion of position of the leveraged investment vehicle. Full consideration should be given to such changes when the targets of fund management are set, so as to reasonably arrange the proportion of investment fund.

(4) Be clear about the features of the gold price mechanism during the investment period is the precondition to set the targets of fund investment

Different gold price mechanisms during the investment period have different influence on the fluctuations of gold price. For example, the gold price mechanism generating from the influence of international geopolitics will always deliver medium- and long-term influence with the extent of 50%-100% on the gold price. In such case, trend investing method may cause relatively long-term investment period with lower-average accumulative loss. It cannot conclude whether the investment reaches the preset targets of fund management or not once the correctness of price mechanism adjustment is confirmed, so an investor should make his/her targets of fund management become the long-term ones.