What does gold trading involve?
All modern gold trading involves speculating on gold prices, which can fluctuate wildly depending on the pressures of supply and demand. As well as being used as an investment, gold is used in a huge number of products, from jewellery to computer and mobile phone components.
The gold market is popular with both short term day traders and long term investors. Gold is entrenched into our economic, industrial and retail systems. Unlike other metals, it also occupies a special place in terms of our emotional attachment to it.
Prices for gold are tied to many different factors. World events, political upheaval and shifts in the business world can all impact the price of gold, so the gold market itself can be highly volatile. This makes it an incredibly profitable metal with vast opportunities for smart investors. Many people trade solely on fluctuations of the price of gold, while others seek to use it as a safe haven for their investments.
How to trade in gold
Since gold is used as an industrial metal, as a decorative piece of jewellery and also as a haven asset, it remains one of the most traded metals in the world. Before you start to trade in gold, it pays to learn some of the terminology used and to learn the fundamentals of gold trading.
Basically, there are two ways to trade in gold; you can either speculate on the price of gold itself as a day trader or use gold as a long term investment hedge against inflation. Common terminology you should be familiar with includes ‘Gold Bullion’, which denotes physical gold, usually bars or coins, ‘Gold certificates’, which show ownership, and day trading terms such as futures, swaps and EFTs.
How to choose a broker and open an account
If you want to make real money by trading gold, the first step you should take is finding a reliable, reputable and experienced broker. Although there are thousands of brokerage firms offering their services via the internet, not every firm is trustworthy.
Investors need to carefully scrutinise their chosen broker to ensure that it is certified, insured and has a good track history. Since the price of gold is tied to so many different factors, a broker needs to have the right levels of experience to be able to advise you successfully. Generally, brokers will rely on charting software and their experience to inform you of how they believe the gold market will fluctuate.
How to buy gold
There are many ways in which investors can buy gold. If you are seeking to use physical gold as a long term haven for funds, then you can purchase either the actual metal itself in the form of bars or coins or you can purchase gold certificates, which are issued by companies and hold the value of actual gold.
Certificates can be a risky proposition, however, since their worth is directly tied to the issuing company. Investors can also trade via an ETF (exchange traded fund) which will make purchases on your behalf. Day trading is usually done via futures contracts. The main gold markets are the US futures market, the Shanghai Gold Exchange, and the London OTC market.
Trading Gold CFDs
Another way to trade gold online is by trading Gold CFDs (Contracts for Difference). You can choose to trade either when the price of the metal is rising or falling. If the market is falling, you can ‘short’ the asset, by selling the gold, then buy it later at a higher value. Conversely, you can ‘buy low’ then sell the gold when it rises in value.
A common trading tool when trading gold as a CFD is the use of leveraged investments. In plain terms, leveraging is using funds that you have borrowed from a financial institution or a brokerage firm to maximise your purchasing power. At AvaTrade, for example, you can trade gold using leverage of 20:1.
Companies and individual investors use leverage to increase their returns. It must be said, however, that any leveraged trade carries with it a higher degree of risk since you are in effect using debt as a means to gain profit. New investors need to be very cautious when using any kind of leverage when trading. If the trade goes against you, you will end up not only losing your initial investment but also owing the leveraged amount as well.
The big question that we have to ask ourselves before we make any type of trade or gold investment, is ‘Will this be profitable for me?’ There is no sense in becoming involved in a marketplace without the expectation of a good return on your initial investment. Whether you invest in gold as a long term hedge or you are trading CFDs, there are many opportunities to make a good profit on the gold market. The gold market has very good liquidity and can see up to US$80 billion being traded in a single day. Smart day traders can make good profits speculating on prices, while long term investors are always guaranteed a market for their assets.
Tips on gold trading
Getting the most out of your investment in gold means making smart decisions based on expert advice and staying well informed of what can move the gold market. Our top tip for trading in gold is to make sure you understand how the market is moving. Keep a close watch on how the central banks are buying and selling. Watch for market volatility as trading in a bull market as opposed to a bear market will require different strategies. Investors and traders are advised to monitor the fluctuations in the US dollar, since this can have a major impact on the gold price. Demand for jewellery or industrial demand for gold also need to be scrutinized.
How to choose a gold trading style and strategy
Adopting the right trading style is crucial to making a profit in the gold market. Your trading style should always be determined by two factors: the first being your own appetite for risk. Are you comfortable with being exposed to high amounts of risk via short term trading, or are you more secure with a longer-term investment that comes with a lower profit margin?
Choosing the right trading style will minimise your stress and allow you to make smarter decisions. The other factor is the volatility of the gold market itself. Market fluctuations can help you to decide which trading style to adopt. An experienced and well-informed broker should be able to advise you on the best option.
Strategies help investors and brokers to analyse market movements and better predict price fluctuations. As we have mentioned, the price of gold is dependent on a range of factors, from global political situations to environmental events to the supply and demand for the metal itself.
One strategy used in trading gold is to monitor currencies. If the Australian dollar is doing well against the American dollar, you may want to purchase gold since Australia is a major gold-producing nation. If the Australian dollar is falling against the US dollar, then it may be time to sell. Brokers will use specialised software and analyse highly technical volume and price charts to find the right strategy.
Set your stops and limits
Setting your stops and limits is essential in regard to limiting your exposure to risk and maximising your opportunities for profit. Stops and limits work much like the relationship between the brakes in a car and the speed limits on the road. If your vehicle is going too fast in relation to the limits set by the road signs, the driver applies the brakes. Stops and limits work the same way. Basically, an investor will inform their broker to either buy or sell a stock once it has reached a specific price. Limit orders are visible to the market and can impact prices depending on who has issued them. Stop orders are invisible until they are executed.
Risks in trading gold
Like any stock or commodity, there are a wide variety of risks when trading gold. Price fluctuations are heavily dependent on geopolitical trends, so an unexpected event can cause shockwaves in the gold market.
Currency fluctuations also pose a risk – since precious metals are traded in US dollars, any fall or rise in the value of the Greenback will have an impact.
Only by scrutinising a wide range of factors can investors minimise their risk when trading gold. It is for this reason that we always recommend using a reputable online broker since they will not only have the expertise, but also the time to devote to looking out for any events that could sway the price of gold.
To successfully trade in the gold market and secure a decent profit, investors need to be aware that they are dealing with a highly volatile commodity with a price that is susceptible to a wide range of outside factors. Being aware of how polarities will shift the gold market is crucial. A careful analysis of both long term and short term trends is also key. The volatility of gold means that while it can generate enormous profits, however gold trading also carries with it enormous risk.
That said, gold is a time-tested asset that holds its value well during times of instability. The bottom line: proceed with caution, always be well informed and choose the right broker for your gold trading ventures!