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What is the difference between trading physical gold forwards and XAU/USD forwards? Why are both traded? The physical gold forward would obviously be settled physically, but how is an XAU/USD settled, i.e, when gold is traded as a currency?

Thanks

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cash settled ..XAU/USD is nothing but the spot price of gold quoted in dollars. The main difference between physical forwards and xau would be the end users. Think of big jewelry chains that need to lock in the price to keep their input costs low while the latter would be used by speculators (at the very least). Hence no different from a SnP futures. But the XAU is used by a lot of traders that have views on the USD given the apparent -ve correlation (again, i personally don't believe in correlations given the normalcy assumptions and time frame cherry picks by users)..an interesting article explains some of the above https://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2013/12/12/What_Does_The_USDOLLAR_Mean_For_Gold.html

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  • $\begingroup$ Even if it is usually cash settled... there must be some mechanism to keep the game honest and avoid manipulation I would think/hope. But I have never traded XAU so I don't know... (The link you provide does not address market mechanics at all). $\endgroup$ – noob2 Jan 17 '17 at 16:44
  • $\begingroup$ @noob2 sure it doesn't :)...the query was regarding primary differences of XAU/USD and physical forwards and i was trying to clarify that point. Also i didn't get your concern about keeping the game "honest" .. like literally every other asset class that is traded, there is a fundamental basis to its pricing and some noise.. if you really think there's manipulation there then you could always compare its performance to spot gold rates provided by world gold council and XAU/USD (which is 1218 and 1212 to an ounce) ..very very tiny chance of any manipulation you see :) $\endgroup$ – Vikram Murthy Jan 18 '17 at 5:52
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Think of it this way: you would like to trade physical gold in the London market, but you are not set up for it, you don't have a warehouse, you don't know the right people, etc. You could ask "a friend" to trade physical gold for you and give you the gains or losses in cash.

Trading XAU/USD is similar, but instead of a friend, you would rely on the foreign exchange department of a bank as the intermediary. One difference is the bank does not do it just for you but for multiple customers, and their gold (and the bank's) is comingled in one account. (You don't get to see and touch "your gold" like you would with physical trading, but if the bank is reputable I would not worry too much about that). For speculative trading (where you don't need delivery) it is simpler and easier, especially if you already have an FX relationship with a bank. You might be able to get delivery on an exceptional basis for an extra fee, but if you want delivery you would probably go to the trouble of setting up your own physical gold trading operation.

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