How To Trade Gold: Is This Metal Precious for Traders?
How To Trade Gold: Is This Metal Precious for Traders?
5 April 2022
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How To Trade Gold: Is This Metal Precious for Traders?
Commodities aren’t among the first financial instruments you consider when you first start trading. However, many of them could be really an attractive investment — for example, metals such as gold. When you hear about gold, for sure, you imagine jewelry or gold bars. But did you know you can trade gold on a trading platform without owning it? We are ready to uncover the pros and cons of gold trading and share tips on how to make gold trading potentially profitable.
What Is Gold Trading?
When you trade gold, you don’t get real bullion but speculate on the underlying asset’s price via a spot price speculation, futures contract, or options. Also, you can trade stock CFDs of gold-mining companies and exchange-traded funds (ETFs).
Trading may allow you to make a profit regardless of whether the price of the instrument rises or falls. While investing implies putting money in an asset that is expected to increase in value in the future, trading is about making a correct prediction about the asset’s price direction.
If you’ve ever traded currencies on Forex, it won’t be difficult for you to trade gold, as the idea is the same. You deposit funds in your brokerage account and open and close positions, thus, gaining profit or bearing losses. You can use a margin account and increase your initial deposit with leverage, meaning that you can start trading with just $100.
How To Invest and Trade Gold: Numerous Financial Instruments
Below, you can see the most common ways to invest in the gold market.
How to Invest/Trade
Spot Gold CFD
Spot gold trading resembles Forex trading, where you can trade pairs. That’s why gold is traded as an XAU/USD pair. XAU is the chemical symbol of gold. When trading the XAU/USD pair, you predict the value of gold against the US dollar.
When trading the XAU/USD pair, you can either buy gold and sell USD or vice versa.
A futures contract is an agreement to buy or sell an underlying asset (gold) at a certain price at a specific date in the future.
Technically, you can take physical bullion. However, traders settle for cash or sell the contract before it expires. The standard contract represents 100 troy ounces of gold.
COMEX, or the Commodity Exchange Inc., is the primary platform for metals trading. Still, the Shanghai Gold Exchange is gaining popularity as well.
Options are contracts that allow but do not require the holder to trade the asset for an agreed price on a certain date. Call options allow you to purchase gold. Put options are used to sell the metal.
An exchange-traded fund tracks the price movement of gold itself or a basket of gold mining stocks.
Investors use ETFs, as it’s a cheaper option to invest in gold compared to futures or stocks of gold-mining firms. Moreover, ETFs are quite liquid. They provide a relatively stable income.
There are numerous gold ETFs. Moreover, you can invest in ETFs and trade them via CFDs.
Stocks of Gold-Mining Companies
Stocks are another option to invest in the gold market. However, it’s an indirect way, as you buy shares of gold-mining companies and don’t invest in gold itself. Moreover, stock prices are highly volatile compared to gold ones.
To successfully invest in the gold stocks, you should choose leading gold miners, including Barrick Gold, Newmont, and Polyus.
Stocks can be traded via CFD or used for direct investments when you buy shares of a certain company.
You can buy physical gold from a brokerage, bank, or metals dealer. The physical commodity is presented in different-size bullions, from a quarter-ounce wafer to a 400-ounce brick.
Also, investors can buy coins whose value depends on their gold content, including a premium. Gold coins should be insured and kept safely in deposit boxes.
When buying jewelry, you can also invest in gold. Jewelry usually includes gems and other metals that raise its value. However, you should always remember that it’s not the best investment decision, as the retail price may exceed the meltdown value.
What Moves Gold Prices?
As the success of trades depends on the correctness of your forecasts, you should always know what affects the price of the asset you trade. Let’s discuss what can affect the direction of the gold rate.
Supply and demand determine the price of any financial instrument. If the supply increases, the rate declines. When the demand rises, the price moves up, too. All the factors mentioned below will affect supply and demand to some degree, defining the gold price.
Safe-haven investment. There are several safe-haven assets that serve as a refuge for investors. Such assets rise in value in times of market uncertainties, as investors need to hedge their funds. So they look for reliable instruments that provide certainty and stable income. Gold is among such assets. Any time there are economic or political issues, the gold price rises. For instance, the price of gold skyrocketed by over 13% from January to May 2020 due to uncertainties caused by the Covid-19 pandemic. Still, it doesn’t mean that gold will depreciate as soon as the market mood is optimistic; its value will be just stable.
Industrial needs. Gold is used not only for jewelry but also for technology and investments. When demand for the metal increases in any of the industries, its price rises. Thus, you should know that demand for jewelry and electronics may fall in times of market uncertainty, pulling gold’s price down.
Production. The largest part of the gold supply is provided by mining — so, news about gold mine discoveries will push the asset’s price up. Gold can also be supplied by jewelry and technology recycling. Traders should check data reflecting any information about gold mining and recycling.
USD. As traders prefer CFD trading via the XAU/USD pair, the strength of the US dollar will define the direction of the gold price. When the USD declines, the XAU/USD pair will increase in value and vice versa. It’s worth mentioning that the Federal Reserve monetary policy also affects the gold rate. When the central bank signals an interest rate hike, the gold price moves down. When the Fed is dovish and plans to cut the interest rate, the gold price is expected to increase.
Trading vs. Investing in Gold
Trading and investing are different approaches. Trading allows you to make a profit on both price appreciation and depreciation. At the same time, when you invest in an asset, you should be sure the asset will appreciate in the near future. Otherwise, you will end up with losses.
You don’t need to own the real asset. You just want to speculate on the price difference.
You want to own the underlying asset.
You don’t have significant funds and need to use leverage.
You have significant funds, so you don’t need a “loan” from a brokerage firm.
You need fast rewards. Although trading is available on short-, medium- and long-term timeframes, traders prefer short-term trades to make a profit quickly.
You have time to wait for the price to appreciate (it usually takes weeks or months).
You know that markets are highly volatile and what trading strategies to apply.
You want to try different options, including bullion/coin purchase.
You need to hedge your funds.
You want to diversify your portfolio.
How To Start Trading Gold
If you have chosen gold trading over gold investing, here are some steps that should be followed to have successful trades.
Step 1. Choose a Trading Platform and Create an Account
Being equipped with trading strategies and knowledge about the factors that affect the direction of the gold market is not enough to succeed in gold trading. You should find a reliable trading platform that is controlled by legal authorities, has a user-friendly interface, and provides 24/7 support. The NAGA trading platform could be just what you’re looking for.
To open a trading account, you need to fill out a registration form. On the NAGA platform, before you open a real account, you can sign up for a demo account — if you are a beginner trader, you can try out CFD trading. And if you have some experience, you can hone your strategies. As soon as you are verified, you are ready to proceed with a real account, you will need to pass the KYC procedure, providing the platform with your personal information, financial background, and trading knowledge. NAGA wants to be sure you are skilled enough to deal with real markets.
Only after you pass the KYC procedure, you will be able to deposit funds to open your first trade. Remember to upload scans of your documents, so your account will be fully approved.
Step 2. Practice a Gold Trading Strategy
As we mentioned above, you can use a demo account to practice various technical indicators, find patterns, apply numerous trading strategies, and develop your own trading strategy. If you are not experienced enough to develop your own trading strategy, you can use those listed on the internet. However, it’s recommended to build your own approach.
You can use technical indicators implemented on the NAGA platform and check NAGA Academy, where you can find useful materials about trading tools.
Step 3. Open Your First Trade
By trading gold, you can open long (buy) and short (sell) positions. Before you open a trade, you should forecast the price direction. You can trade on various timeframes - from 1 minute to 1 month.
NAGA allows traders to open market and limit orders. A market order will be opened immediately at the current price. In contrast, a limit order is opened only when the price reaches the level you have defined. Depending on your prediction, you can place an order by clicking only one button.
Step 4. Monitor the Market
Although it’s advisable to set take-profit and stop-loss orders when opening a trade, you should always monitor the news and the market. The take-profit order shows at what level your position should be closed, so you gain profit. The stop-loss order is set to limit losses in case your prediction was inaccurate, and the price moved in the direction you didn’t expect. However, the world changes too fast. Vital economic and political events can change the price direction immediately. Thus, you should stay up-to-date to avoid unbearable losses.
Gold Trading Tips
We have gathered the most useful tips that will help you trade gold.
Trading hours. You should always check trading hours for any financial instrument you trade. The hours differ depending on the market where the instrument is traded. Moreover, you should care about market liquidity.
For instance, when you trade the XAU/USD pair, there are hours when the market liquidity is higher and volatility is lower. As gold is traded against the US dollar, it’s worth considering the liquidity of the USD. The American currency provides high liquidity during the American trading session, which lasts from 12 pm to 9 pm GMT in summer and from 1 pm to 10 pm GMT in winter.
Combine fundamental and technical analysis. It’s vital to combine fundamental factors, technical indicators, and patterns to predict the price direction of the financial instrument.
Risk-on and risk-off sentiment. You should always be aware of the overall market sentiment. As gold is a refuge asset, political and economic events affect its value significantly. When investors are calm, the gold rate will be stable. If the market sentiment is negative, the gold price is anticipated to increase.
Keep an eye on the US dollar rate. When speculating on spot prices, you trade XAU against USD, so you should consider the current trend of the US dollar. USD is also a safe-haven asset. So, you may be confused when forecasting the price direction of the XAU/USD pair. Still, you should remember that USD isn’t considered a strong refuge asset anymore.
Central banks’ gold investments. Sometimes central banks buy large amounts of gold to hedge their funds. Increased buying leads to a price rise.
Trade in ranges. The gold price usually moves within ranges. So, it’s easier to define support and resistance levels based on recent maximums and minimums.
There are numerous ways to invest in the gold market. However, gold trading is the easiest and most attractive option, especially for those who have limited knowledge about financial markets.
Gold is traded as the XAU/USD pair, futures, and options. It’s also possible to trade gold ETFs and stocks of gold-mining companies. Factors that affect the price direction are clear and easy to understand, even for beginner traders. When trading, people are afraid of high risks of potential losses, but gold is a safe-haven asset that confirms its reliability. Therefore, the risks of losses are much lower.
IMPORTANT NOTICE: Any news, opinions, research, analyses, prices or other information contained in this article are provided as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and therefore, it is not subject to any prohibition on dealing ahead of dissemination. Past performance is not an indication of possible future performance. Any action you take upon the information in this article is strictly at your own risk, and we will not be liable for any losses and damages in connection with the use of this article.
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