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Guide to trading Gold


Gold has always been sought after. In our modern world, it is a precious metal used to make jewellery and electronics due to its durability and attractive appearance, medical devices due to its strength and resistance to corrosion, and also for investment due to its enduring value.

To understand how and why traders participate in trading gold, we must first understand that gold is a commodity in the world of trading.


What are commodities?

 

Commodities are raw materials or agricultural products used to produce secondary or finished goods for use or consumption. They are separated into three main categories:


Commodity metals


These include industrial metals that can be used in manufacturing processes to produce other metals or finished goods, such as aluminium, zinc, and copper. These also include precious metals such as gold, silver, and platinum.


Energy commodities


These include non-renewable energy sources such as crude and heating oils, coal, petrol, and natural gas, as well as renewable energy sources such as wind and solar power.


Agricultural commodities


These include crops and related agricultural products such as wheat, sugar, grain, cotton, and more. They also include farm animals and related products, which fall into three main categories: meat products such as pork, mutton, and beef, textile products such as wool, leather, and silk, and other natural and processed food products such as milk, cheese, and eggs.


How commodities are traded?


Commodities can be bought and sold on online exchanges, with other commodities or with currency. Instead of physically buying these assets, traders commonly bet on and aim to profit from fluctuations in their price movements on international exchanges online.

However, when it comes to precious metals such as gold, it is possible through some services for traders to purchase them in gold bars, jewellery, and other products.

 

How to trade gold?

 

Traders trade gold by taking a long or short position on the underlying price of the precious metal without owning the asset physically, through trading gold Contracts for Differences (CFDs).

The symbol for gold in trading is XAU, and traders can participate in the gold market through gold spot trading and gold futures trading, among other ways.

 

Gold spot trading


Firstly, traders can trade gold upfront or ‘on the spot’. The market price displayed on online exchanges usually indicates how much one troy ounce of gold currently costs. Troy ounce is the metric used in weighing precious metals, and one troy ounce is the equivalent of about 31 grams.

For example, if gold is being traded against the US dollar, traders may see ‘XAU/USD’ with the Bid price of 1,865.10 and the Ask price of 1,866.10. This means that it costs at least

$1,865.10 to buy one troy ounce of gold and at least $1,866.10 to sell it.

A trader who foresees the rise in the value of gold in the near future may purchase 300 troy ounces of the precious metal with $559,530 on the spot. After two weeks, when the price of gold does increase, and he sells his gold at the price of 1,880.10 per troy ounce, he makes a profit of $4,500.


Gold futures trading


Another popular way of trading gold is to purchase a futures contract. A futures contract is a legally binding agreement between two parties to buy and sell a certain amount of gold. It specifies the quantity and quality of gold to be traded, and when and where the trade will occur.

The specified amount of gold is traded on its underlying price at the time of drawing up the contract, with the prospect that its asset price will increase or decrease for the trader to make a profit.

Traders who predict that the price of gold will rise will take the buyer’s position or go long, while traders who predict the opposite will take the seller’s position or go short.

Gold futures trading offers many advantages, such as financial leverage and flexibility. With leverage, traders can open large positions with just a fraction of the total capital required for the entire position size. Traders also have more flexibility in trading because they can take positions based on speculations without risking their capital immediately.


What affects the price of gold?

 

Like all commodities, the price of gold is primarily determined by supply and demand and investor behaviour, all of which fluctuate according to international economic, political, and financial events and market sentiment.

 

Increased global demands


Over the past few decades, the price of gold has increased substantially due to its steady increase in global demand. This can be divided into three main categories: investment, jewellery, and other industrial demands.

 

Investment demands

 

One-third of the demand for gold fulfils trading and investment purposes, as gold is considered a ‘safe investment’ due to its enduring quality in times of economic turbulence.

Unlike currency, real estate, and returns on bonds, the value of gold is less likely to depreciate drastically. During economic downturns, recessions, or periods of financial stress, people prefer to invest in gold to protect their wealth.

 

Jewellery demands


According to the World Gold Council, jewellery production from gold accounts for approximately half of the gold demand annually, which adds up to thousands of tonnes of the precious metal. Although gold does not ‘disappear’ once manufactured, jewellery is often kept and stored away, leading to a continued demand for more to be produced.

 

Other industrial demands


Global gold demand also comes from other fields to produce medical tools, weapons, aircrafts, automobiles, and more.

When there is a higher demand for gold than its supply, the value of gold increases and naturally so does its price. When there is a lower demand than its supply, its value and price decrease. This brings us to our second factor – the supply of gold.

 

Decreased global supplies


Gold is mined, and when there is a decrease in the rate of gold mining, it becomes difficult to fulfil the continued demands, causing its price to rise. In the past decade, it has been estimated that most of the world’s gold has already been mined. Production has also begun to slow down and even decline in the past few years.

 

Benefits of trading gold


Portfolio diversification


Traders often invest in commodities such as gold alongside stocks and forex to diversify their investment portfolio. This is because, unlike other investments, the supply of gold has been relatively constant over the years.

Gold prices also have little to no correlation with fluctuations in the stock and forex markets, which means that should these markets plummet, a trader who has invested in gold will not take the hit in those investments. Portfolio diversification is a good way for traders to protect their wealth.


As a hedge in economic turmoil


Gold is also traded as a hedge in periods of economic turmoil as its prices are not directly affected. On the contrary, many turn to invest in gold during turbulent financial times, hence increasing its demand and market price.

Hedging is a popular investment position traders take to offset potential losses from a related investment.

For example, a trader who purchases an American company’s stock shares may hedge this position by purchasing a certain amount of gold. Suppose it so happens that the American economy takes a downturn and the company’s stocks plummet before the trader can sell his shares. In this case, he can offset his losses with the increase in the price of gold he has bought.

 

The bottom line


Gold is a commodity, and it can be traded in a similar manner as stocks and foreign currencies. It has a high tendency to hold its value, and its market price remains largely unaffected by inflation and individual company performance. These characteristics make trading gold a popular option in portfolio diversification.

Despite this, it is essential to remember that all trading involves a certain level of risk, and traders should invest reasonably.

 

Ready to trade gold?

 

GKFX is a European Union regulated broker, and we offer deep liquidity and low spreads for gold spot trading. We offer Standard accounts for retail traders with no commission charged and Premium accounts for elite traders with free trading tools and trading signals.

GKFX traders can access our trading platform and make demo and live trades. They can also access daily and weekly market analyses to aid in their investing journey. Open a free trading account and get started today.