“Market Maker leveraged” trading of XAUs offers more advantages as compared to trading traditional fiat currencies methods of “leverage trading of gold”. In traditional leverage trading of gold using fiat currency for the purchase of gold; should the market price of gold fall relative to the market entry position it would result in the trader being subject to margin calls or having to close their open position and incur a loss.
When using XAUs for leverage trading however, should the market price of gold fall relative to the market entry position the trader can keep their open position without the risk of being forced to either close or liquidate their open position provided the loss is smaller than the value of the remaining XAUs equivalent to the value of the leveraged funds or a XAUs margin call limit established by the financer. Under typical gold market conditions and time horizons, it is unlikely a loss would exceed the remaining XAUs or reach the typical financier’s margin call limit. This reduces the pressure on the trader to close their position and increases the opportunity for the financier to increase lending and increase profits.
Alternatively, when the spot gold price direction moves in favor of the market entry position; incurring a gain, the trader can claim the gain; take the profit in fiat currency and convert the gain into additional XAUs less a small transaction fee. Unlike the leverage trading using fiat currency that is zero-sum trading, XAUs achieve a real gain in gold weight. Example of leverage gold trading using traditional fiat currency compared to XAUs:
XAUs innovation of using gold weight rather than fiat currency for gold trading will open trading opportunities to medium and small traders that have traditionally been excluded from leverage and unleveraged gold trading because of minimum purchase sizes and margin call limits. XAUs makes it feasible for a minimum purchase gold weight of one troy ounce While this should increase the activity of large and institutional traders benefiting from trading in XAUs represented by gold rather than fiat currency.
This opens the opportunity for gold trading and leverage gold trading within the Islamic community because trading with XAUs is undertaken in physical gold not fiat currency and provides the channel to avoid incurring interest on debt. XAUs are likely to become popular among Shariah based traders.