Gold is often referred to as a “safe haven” because it has maintained its value during periods of market uncertainty. It is widely regarded as a means to safeguard against economic uncertainty. Although gold is a part of our daily lives, the idea of gold trading can appear intimidating for newcomers. This article will simplify everything you need to understand about gold trading and provide you with the essential knowledge to begin your gold trading journey.
What is Gold Trading?
Gold trading consists of predicting changes in gold market prices to earn profits, usually via futures, options, spot prices, shares, and exchange-traded funds (ETFs). Generally, physical gold bars or coins are not exchanged during these transactions; rather, they are settled in cash.
There are several motivations for engaging in gold trading, such as pure speculation, the desire to purchase and possess physical gold, or as a safeguard against economic instability.
While trading gold online, it is not always necessary to adhere to the conventional principle of ‘buy low, sell high,’ as one can take both long and short positions on gold prices, capitalising on markets that decline in value as well as those that appreciate.
Regardless of the position you adopt, the objective of gold trading is to forecast the market’s movement direction. The greater the market shifts in the direction you anticipated, the more profit you stand to gain; conversely, the more it moves against your prediction, the greater your potential losses.
Types of Gold You Can Trade
The allure of gold trading is found in its adaptability. Let us examine the various forms this valuable metal assumes in the trading arena:
1. Gold Bullion
Bullion denotes tangible gold, usually in the form of bars or coins, frequently held as reserves by central banks or possessed by investors. Bullion provides a means to engage in the physical trading of gold, yet its value is determined by the prevailing market price rather than its scarcity or collectability.
2. Spot Gold
Spot gold trading entails the purchase or sale of gold at its current market price, with transactions generally settled within two business days. This is the most common and simple way to trade gold, where you own the actual asset.
3. Gold Futures
Gold futures consist of standardised contracts to buy or sell a specified quantity of gold at a predetermined price on a future date. The contracts are traded on futures markets, aiming to make a profit from fluctuations in gold prices.
4. Gold Options
Gold options give you the right, but not the requirement, to purchase or sell gold at a fixed price during a specified period. Options offer a more adaptable approach to trading gold, as they necessitate less capital while still granting exposure to price fluctuations.
5. Gold ETFs
Gold exchange-traded funds (ETFs) represent investment vehicles that are traded on stock exchanges, similar to shares, and are supported by gold reserves. These funds allow investors to gain exposure to gold prices without the need to physically possess the metal, thus offering a practical choice for those looking to invest.
6. Gold Stocks
Investing in gold stocks means buying shares of companies that mine, refine, or explore for gold. When you trade these stocks, you are not directly buying gold; instead, you are speculating on the performance of businesses within the gold industry.
Why Trade Gold?
Here are several reasons why beginners should consider trading gold:
1. Stability and Historical Value
For centuries, gold has been seen as a precious commodity and is frequently viewed as a safe investment during times of economic uncertainty. In contrast to currencies, which may be influenced by governmental policies and inflation, gold has demonstrated its ability to maintain value over time.
This historical consistency can offer beginners a sense of security as they venture into the trading arena.
2. Leverage Opportunities
Many CFD trading platforms offer the ability to trade gold on margin. This enables traders to control a bigger position with a smaller investment.
Nevertheless, this presents a double-edged sword. While leverage can enhance potential returns for traders, it can equally amplify the potential losses faced. Beginners must comprehend the risks that come along with leverage before engaging in high-margin trading.
3. Diversification
Trading in gold presents an opportunity for novices to broaden their trading portfolio. Various assets, such as stocks, bonds, and commodities, respond differently to market fluctuations.
New traders can incorporate gold as a distinct asset within their trading strategy to distribute risk across multiple asset classes. This diversification can assist in alleviating potential losses in one product by leveraging the possible gains in another.
4. High Liquidity
Gold is regarded as one of the most liquid assets available for trading due to its ease of buying and selling, supported by a substantial number of market participants.
It can be traded through various means, including ETFs, CFDs, options, and futures. This wide array of options enables traders to seamlessly enter or exit their trading positions.
For beginners, this high liquidity minimises the risk of being stuck in a trade (where there are no buyers or sellers) and offers the flexibility to add or remove it from their portfolio.
How Does the Gold Market Work?
The local market serves as a venue for the buying and selling of gold. It comprises a diverse array of buyers and sellers, ranging from large corporations to everyday individuals seeking to invest in this valuable metal. Gold can be traded through multiple channels, including physical locations, online platforms, and specialised markets.
The cost of gold fluctuates based on the demand for buying and the existing supply, a concept rooted in the principles of supply and demand. These price variations can be affected by global events, major incidents, or changes in monetary systems. Generally, the price is quoted in US dollars, and it may fluctuate in response to changes in the currency’s value.
Central banks, which are institutions that provide financial and banking services to governments, play a crucial role in the gold market. They participate in the buying and selling of gold to support their nations’ monetary policy objectives. Additionally, gold is utilised in various industries, including the production of jewellery. Collectively, these factors contribute to the dynamics of the gold market.
Ways to Trade Gold?
- Spot Gold: Gold is classified as an over-the-counter asset, with 70% of global gold trading occurring in physical form through the London Bullion Market Association. Although the act of moving gold bars between vaults may not seem particularly efficient, the majority of these participants are international banks, bullion refiners, and dealers.
- Gold futures and options: Another way to trade gold is by using futures and options contracts. The largest marketplace for gold futures is the COMEX segment of the Chicago Mercantile Exchange (CME), which facilitates electronic trading nearly 24 hours a day. Each contract represents 100 troy ounces (3.11kg). Given that gold is utilised globally, it is traded on nearly all stock exchanges worldwide.
- Investing: Investing in stocks or ETFs is an easy way to get exposure to gold. For those seeking leveraged exposure to the gold price, purchasing shares in gold companies and mining firms listed on any securities exchange is an option. Alternatively, one can invest in gold ETFs, which mirror the value of the underlying commodity.
- Trading via CFDs: Another possibility is to engage in trading Gold CFDs (contracts for difference). In simple terms, this enables traders to buy or sell positions in a financial instrument, allowing them to benefit from fluctuations in the gold price without the need to physically acquire the commodity.
How to Trade Gold Online?
Investing in gold online represents the most straightforward and accessible approach for individuals to engage in the precious metals market. Utilising digital platforms and brokerage services, one can explore a comprehensive array of investment opportunities in gold from the convenience of their residence.
For those interested in purchasing gold bars or coins, it is advisable to find a trustworthy dealer through the Internet. Numerous dealers allow potential buyers to view and acquire their products directly on their websites. However, in some instances, it may be necessary to contact them by phone to finalise the transaction.
If you wish to trade in gold stocks or ETFs, this can be accomplished effortlessly through an online trading platform by following these steps:
1. Select a Dependable Broker – An effective gold trading broker will furnish you with the necessary environment to trade gold efficiently and successfully. Conversely, an inadequate broker may hinder your progress before you even begin.
Key factors to consider when selecting a CFD broker include appropriate and multijurisdictional regulation, trading platforms, trading tools and resources, payment options, and customer support.
2. Open and Fund Your Account – Once you have selected a trustworthy broker, proceed to open and fund your trading account. A verification process will be necessary to ensure compliance and security.
A reputable broker will provide you with various secure and convenient options for depositing and withdrawing funds from your trading account. Additionally, there should be a demo account available for you to practice without the risk of losing any money.
3. Learn about Gold – Gather as much information as you can about the gold market and CFD trading. Moreover, it is advisable to apply your knowledge and skills on a demo trading account before risking actual funds.
4. Develop a Trading Plan – Develop a forex trading strategy that guides your method for trading gold CFDs. A well-structured trading plan will streamline your trading activities and assist you in maintaining control and discipline within the volatile gold market.
5. Place your First Trade – When you feel prepared to execute your first trade with real money, access your selected trading platform and choose gold as the asset to trade. Determine your trade size and opt to buy if you anticipate a price increase or sell if you expect a price decrease.
6. Keep an Eye on your Trade – It’s important to stay updated on market news while your gold trades are still active. Depending on your trading strategy, you can either close your positions manually or set it up to happen automatically.
Don’t forget to place a Stop Loss order to help minimise potential losses if the market moves against you, and set up Take Profit orders to secure your gains when the prices move in your favour.
What Moves Gold Prices?
The prices of gold trading are influenced by supply and demand, similar to all markets that are traded on exchanges. Therefore, if the gold market experiences an oversupply and the demand for gold does not increase correspondingly, the price of gold is likely to decrease.
Conversely, if the demand for gold increases without a corresponding rise in supply, the price of gold is expected to increase.
The primary factors that affect the price of gold include:
- Economic and political instability: Gold is regarded as a safe-haven asset, which means that during periods of uncertainty, it serves as a hedge against inflation. Gold’s status as a haven is derived from its historical role as a store of value and its consistent stability over time. As inflation escalates, traders and investors may opt to preserve their wealth in gold rather than in higher-risk assets, leading to an increase in the price of gold.
- Industrial applications: The majority of gold demand originates from jewellery, technology, and investments. The ongoing and varied demand for gold contributes to a relatively stable market. For instance, while economic uncertainty may reduce the demand for jewellery and electronic products, investment inflows would prevent the gold price from experiencing extreme volatility.
- Discoveries: The supply of gold is limited, which means that eventually, new gold mining operations will no longer be economically viable. Nevertheless, at present, mining still constitutes 75% of the total gold supply. Therefore, any new gold discovery will enhance the availability of the metal and temporarily drive prices up.
- The US dollar: Since gold is priced in US dollars, any changes in the value of the dollar can affect the attractiveness of gold to investors. For instance, if the value of the US dollar decreases, individuals looking to purchase gold in another currency would benefit from this situation.
Gold Trading Tips for Beginners
When it comes to trading gold, beginners have several strategies to consider on their journey. You may utilise basic trading strategies to evaluate the inherent value of gold, taking into account economic and financial elements.
Additionally, you can use technical analysis to examine gold price charts with various trading tools. These tools help identify patterns or trends that may affect the price movements of XAU/USD.
1. Know the Gold Trading Hours
Gold trading takes place continuously worldwide because of the global nature of the market. The gold market is open 24 hours a day, five days a week, allowing traders to participate in continuous trading. This extended trading time is facilitated by the overlapping sessions of major financial centres across different time zones.
Although gold trading is accessible throughout the day, novice traders will discover the highest market liquidity during the New York trading hours. You can trade during peak times when liquidity is high and volatility is low. However, keep in mind that volatility can increase the risk of losses due to significant market movements.
To learn more, you can read our guide on the best time to trade gold in forex.
2. Have a Solid Gold Trading Strategy
For beginners, having a well-thought-out gold trading strategy is crucial. It acts as your guiding principle, providing direction and structure for executing your gold trades.
A suitable trading strategy will help you identify entry and exit points, ensuring that potential losses are limited and your trades are protected. Emotional responses can lead to impulsive trading decisions, resulting in costly mistakes for beginners. A structured trading strategy helps reduce these biases, encouraging a consistent trading approach.
With a clear and strong trading strategy, along with effective risk management, you can be better equipped to handle the complexities of gold trading.
Frequently Asked Questions
Q. What is the best way to trade in gold?
A. Investors can use tools like gold futures and options to protect themselves from risk while also aiming for better returns, thanks to the price fluctuations of gold. However, it’s crucial to understand the market variables, assess the factors that impact them, and take the right steps to reduce risk.
Q. Is it safe to trade gold?
A. When it comes to tangible assets, gold stands out. It gives you a feeling of security and true ownership. Unlike many other investments, there’s no counterparty risk involved because physical gold doesn’t rely on any financial institution. Plus, you can sell it almost anywhere around the globe!
Q. When to trade gold?
A. If you want to boost your profits while trading gold, it’s a good idea to pay attention to the North American trading session, which runs from 3 pm to 11 pm GMT+3. This is when you’ll see the highest volume and volatility.
Alternatively, you might want to look at the European session from 10 am to 6 pm GMT+3, as it can offer some great opportunities, particularly during market openings and when important economic news is released.
Q. Who controls gold?
A. The gold market is influenced by a variety of factors working together, such as central banks, big investors, and the overall balance of supply and demand around the world, rather than being dominated by just one player.
Q. What is gold used for in trading?
A. Investors often turn to gold when there’s political or economic turmoil. It’s a popular choice for hedging against inflation or the devaluation of currency.
Conclusion
Participating in gold trading enables investors to expand their portfolios and benefit from price fluctuations. By using instruments like gold futures and options, investors can manage risk and achieve better returns, taking advantage of gold’s price volatility.
However, it is crucial to understand market variables, assess the factors that affect them, and implement appropriate strategies to reduce risk. The gold market offers a structured and transparent platform for effective gold commodity trading, catering to both professionals and amateurs.