Trading in gold can be done in a number of ways. For one, you can buy physical gold, or you can invest in a stock of a company that mines for gold. You can also invest in paper gold such as buying gold ETF’s or you can trade gold futures which are commodity contracts. You can also trade gold in the spot forex market.
With so many choices for trading in gold, the obvious question that comes to mind is how to trade in gold and what is the best way to do this.
First of all, there is no right answer to this. For example, if you are from Asia, such as China or India, chances are that your mother or your wife would be more interested to buy gold (in the form of jewelry).
However, if you are an investor, you can either buy physical gold (bullion) or you could simply buy and hold the paper gold in the form of ETF or stocks.
There are many ways to trade in gold. It only depends on which way is more ideal for you.
As an age-old form of investing, gold trading has the advantage of not being tied to the market fluctuations of any one particular country. The financial health of a country and its governments economic policies are not generally an issue.
Trading in gold is often seen as a hedge against the vicissitudes of currency rates or rising and falling stock markets.
The way one trades gold is of course a matter of personal choice and their investing goals. If someone wants to gift their grandchild with a gold bullion, then buying physical gold makes sense. But if you want to make your money work for you, trading or investing in gold is an option worth considering.
How is gold measured?
The most common reference is troy – a troy ounce equals about 31.10 grams; an avoirdupois ounce equals about 28.35 grams. For instance, if the price of gold is 1212.97, it signifies that an ounce of gold is traded for 1212.97USD. Gold can also be priced in regional currencies, such as XAUEUR, XAUINR and so on.
Trading in gold – The different ways you can do this
Below are some of the common ways one can trade, invest or speculate on gold prices.
Investing in gold with ETF’s
ETF’s or exchange traded funds are a basket of securities or assets that trade like a stock. Similar to a mutual fund, an ETF has a money or a fund manager who is responsible with managing the fund. An ETF is primarily used to trade or target a particular security or group of securities.
For example, the most common ETF is the SPDR S&P500 ETF Trust or SPY. The SPY is an index ETF and is designed to track the performance of the S&P500 large cap index.
Similarly, there are gold ETF’s such as GLD or IAU which are designed to track the price of gold. With an ETF, you can buy or sell it similar to a stock.
Below is a chart for SPDR Gold shares ETF (GLD). As you can see, the GLD ETF tracks the price of gold, but trades a multiple. So, if (spot) gold price was $1200 an ounce, then the GLD ETF trades at $120.
Besides the Gold ETF, you could look at trading gold futures.
Trading gold with futures
With gold futures you will need to have a futures trading account. With gold futures you can merely speculate on gold prices, but you do not own any gold. In most cases you will have to find the current gold futures contract to trade as they expire every quarter.
The chart below shows a price chart for gold futures.
Trading gold with spot forex
Trading in gold is done over the counter (OTC) on an online trading platform as in other FX market transactions. The deal is accomplished directly between the buyer and seller and no intermediary is involved. The internationally accepted code for gold is XAU.
The code is created from X in the currency futures market and the chemical sign for gold (AU).
As all in spot forex market trading, the buying and selling of gold rates does not require that the trader take actual possession of the metal.
For example, if you purchase gold on the foreign exchange market for the price of 612.97USD, no one mails an ounce of gold to your office, but you do have the commitment to buy gold at $612.97. When you close the trade, you sell the gold (XAU) and your obligation expires.
If you sell the gold for the price of, say, $615.00, you have made a profit of $3.03 for every ounce of gold that you sold.
Gold prices and currency exchange rate influences
The price of gold can have a significant impact on the price of other currencies. In particular, higher gold rates can be especially important to the currencies of the leading gold-producing countries. With Canada as the worlds 5th largest gold producer and Australia as the world’s 3rd largest exporter of gold, the gold prices are of particular interest.
For instance, if you believe the gold rates will continue to increase, you can implement trades in the Canadian or Australian dollar because the currencies of these countries will likely become more valuable.
Gold is regarded as neutral in the currency futures market and unlike currency it cannot be manipulated
Because gold is a precious metal that is not identified with any one particular nation, its price can have an impact on the trading in many different currencies.
For example, the price of gold can go higher amid the vicissitudes of US economic and political events. With higher gold prices, expectations of even higher prices might ensue.
Traders might then decide to sell the USD and purchase Euros because they believe that the Dollar will decrease in value while the price of Euros will increase. announcement.
Gold and monetary policy
After the 2008 global financial crisis, gold prices rose strongly as central banks around the world struggled to stimulate growth.
As inflation started to fall, central banks had to end up lowering interest rates and had to go as far as to start buying bonds in the market, known as quantitative easing or simply, printing money! During these times, confidence in the fiat money fell sharply and gold prices appreciated above $1300.
What is the best way to trade in gold?
If you are a long term investor and you prefer to keep your portfolio balanced, then investing in gold ETF’s or gold mining companies can be a great way to hedge your portfolio. Gold prices tend to be more safe haven and therefore are a good risk against the market’s bullish sentiment.
One can also trade in gold futures, partly to hedge the risks for holding gold in your portfolio or simply day trade gold futures contracts to make money.
At the end of the day, gold is an amazing asset, both physically and on paper as well. It is very liquid and remains one of the most sought after commodity or precious metal in the financial markets.