Gold is a highly liquid yet scarce asset, known as the most popular commodity and a safe haven for traders.
Gold has been traded for centuries with it's unique physical nature, from being used in jewellery to being high in demand across the technology sector for key components in electronics.
In this article, we will introduce traders to the precious metal that has been fascinating the world for years, explain how the gold market works and the ways in which traders can invest and trade in the commodity.
Today, gold is used as jewellery, an investment or even in industries like medicine and electronics. However, for a long time, the precious metal has been used as currency.
But what makes gold so special? Why is, for example, Silver or Palladium not the most popular precious metal?
Gold has always been seen as attractive in colour and brightness (its unique shine), and it is almost indestructible as well.
Gold is rare enough to avoid producers flooding the market with it and bringing down its value, but abundant enough to keep the market liquid.
Humans also have an emotional connection to gold, and it remains important in many cultures today.
Gold is one of the world’s oldest and most trusted forms of currency. For traders, gold's intrinsic value – or “safe haven” appeal – makes it a popular investment and a great way to diversify a portfolio.
There are two main ways to invest in gold. The first is buying physical gold, or shares in a mutual or exchange-traded fund that follows the real-time price of gold.
The second is to take advantage of price fluctuations in the commodity trading market and trade derivatives linked to gold, such as futures, CFDs, options and more. Two of the most popular gold derivatives are gold CFDs and gold futures.
Gold is primarily traded over-the-counter (OTC) and on exchanges. London is the global centre for the OTC market, where market participants trade directly with each other. While this market is less regulated and has a higher degree of flexibility, the counter party risk is higher.
Exchanges are regulated platforms and trading is centralised. They usually offer a standardised contract, which will not suit every trader, as it limits their flexibility.
Aside from London, the other two major gold trading centres are New York City and Shanghai. The COMEX exchange is located in NYC, while the Shanghai Gold Exchange is located in Shanghai.
For beginner traders looking to buy and sell gold as a regular asset in their portfolio, different gold trading strategies and assets will be needed. Read through this section to learn the basics steps to start trading gold.
"Investing in gold is a tale as old as time. Limited supply. Constant demand. There is a reason why it's the most traded precious metal in the world."
Michael Kuchar - CEO of Trading Beasts, Currency and Gold Trading Strategist
Discover the different ways that traders can access the gold market, whether they are interested in trading or investing in the precious metal commodity.
CFD trading is speculating on the rising or falling prices of global financial markets – such as indices, commodities, shares or cryptocurrencies. A CFD trade is a contract between an investor and a broker to settle on the difference in the value of a financial asset or instrument for the duration of the contract.
At the time of closing the contract (a trade), if the price is higher than the opening price, there will be a positive return for the buyer. The seller has to pay the buyer the difference, and that will be the buyer’s profit. The opposite is true if the trade price is lower than the opening price and the buyer will suffer a loss.
Recommended reading: What are CFDs?
A futures contract is a contract to buy or sell a particular asset at a predetermined price at a specified time in the future. Futures are particularly popular amongst short-term traders who wish to speculate on the direction of the gold price. It can also be used for hedging purposes - for example, an investor holding physical gold will not want to sell those frequently, as the transaction costs would add up quickly. Instead, the investor could go short on gold to gain from a decline, while keeping their physical gold as a long-term investment.
Exchanged traded funds have seen a meteoric rise in the past few years, as they are a cost-effective way to invest in a certain asset. Gold ETFs could be suitable for investors looking to invest in gold while keeping transaction costs low.
Gold coins still remain popular with the 5 most popular gold coins being the Krugerrand (South Africa), American Eagle (United States), Canadian Maple (Canada), Australian Nugget (Australia) and the Chinese Panda (China). The disadvantage is that those coins will always be sold at a premium, and investors need to store it appropriately, which can add to the costs (for example, buying a safe or renting a safe in a bank).
Gold bars are available in a variety of dimensions. Premiums are a bit lower, and the market for gold bars is more liquid than for coins.
Gold mining stocks can be traded or invested in through individual stocks, stock CFDs or ETFs that consist of a portfolio of gold miners.
There are multiple factors that can affect the gold price, but the following are amongst the major ones:
The precious metal is generally seen as a safe haven, and prices tend to rise during times of geopolitical tensions.
During times when investors are worried about rising inflation, gold will generally appreciate, as holding cash becomes increasingly unattractive.
Gold and the US Dollar have an inverse relationship. Therefore, expectations of rising interest rates in the US will boost the Dollar and put Gold under pressure. On the other side, should US rate expectations decrease, the US Dollar may decline while gold prices rally.
Buying gold ETFs or trading gold CFDs and futures has become popular, but physical gold is still being used for the production of jewellery and investment (e.g. coins and bars). Demand for such products will have an influence on the gold price too.
Discover the advantages and disadvantages of trading the safe haven precious metal.
Before traders start trading gold, they should understand the characteristics of this asset class, how it correlates to other trading instruments (such as stocks and bonds), and whether it is suitable for their trading strategy. To get a great understanding of gold, sign up for the FREE gold trading course on Axi Academy.
Once traders have decided when they want to start trading gold, they should find the most suitable product based on their trading style and strategy. Some traders will benefit from the spot CFD product, which has lower spreads, while other traders will prefer the futures CFD product, which has a higher spread but no daily swap charges.
After determining which product suits the traders the best, they should test whether their strategy performs well when trading the asset - ideally in a risk-free demo environment. Depending on their trading style, they might find the volatility in gold too high or too low.
Gold is one of the oldest traded commodities. Despite its age, there are traders who are still unsure about trading it, so here are the essential gold trading strategies for all traders.