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How to trade Gold
Gold holds a significant position, with a solid history as a valuable metal that has been used as both a medium of exchange as well as a store of wealth. It is, therefore, important for any investor to attain or retain exposure to this shiny, valuable yellow metal. Gold trading has evolved to the point where traders no longer need to physically own and hold the underlying metal. Gold trading via CFDs is based on the idea of speculating on the price of Gold. The profit or loss is determined by the change in the price of Gold during the contract duration. When trading Gold as a CFD, as with other assets you can buy in both rising or falling markets. That means you can trade when the price of Gold is either rising or falling. In a falling market you can actually short the asset, which means SELL Gold and then later BUY it at a greater value. Likewise, you can BUY low and SELL when Gold rises in value.
So, you might be wondering how to trade gold?
There are a variety of ways investors can trade gold to diversify their portfolio. These are the main ones:
- Physical metal (bullions or coins)
A bullion is a grouping or bulk of precious metal measured in the form of a bar in weight. The benefit of buying physical gold is that you are entirely in charge of a portable, permanent metal that has proven its value throughout history and has acted as a solid hedge against inflation. But on the flip side, physical gold always attracts security concerns and it may cost you higher charges to safely store it or even insure it.
- Gold certificates
These are very similar to the first paper bank notes. Started in the 17th century, these Gold certificates would act as proof of Gold ownership. Today they are still issued by certain banks, and represent a quantity of Gold bullion or coins for its owner. Over time, gold certificates have evolved to become a collector’s item, holding sentimental value which can sometimes be many times above their nominal values. But like any other collector’s item, gold certificates can be worth a huge amount or literally nothing at all, making them inherently risky as ‘investments’.
- Gold futures
This is a contract agreement for the delivery of Gold at a prearranged time in the future, at a preset price. Investors use futures to manage their price risk. Since Gold futures contracts are traded at centralized exchanges, these contracts offer more leverage and flexibility than trading the commodities themselves. Gold futures can be bought and sold at the discretion of investors, and they can also be used to properly hedge or diversify holdings of other financial assets. One of the disadvantages of gold futures is that contracts are time-limited, which means they may attract rollover fees if an investor wants to implement a long-term gold investing strategy. As well, most exchanges offer high minimum futures contract sizes that effectively locks out the bulk of retail investors.
- Gold-based ETFs
ETFs are a basket of assets grouped into a fund, which is managed by expert fund managers. Keep in mind the price of Gold will still continue to affect the ETF. Gold ETFs allow investors to access a wide range of opportunities, with small capital amounts. But despite the convenience, having a gold ETF is essentially leaving the management of your investment to the integrity of a third party, while at the same time paying management and administrative fees.
Gold mining companies are another way to expose your portfolio to this precious metal. You can buy stocks and own the underlying asset, or trade them as CFDs here at AvaTrade. Gold stocks offer excellent exposure to the yellow metal, they are easily liquidated, and investors do not have to deal with the physical commodity. However, the value of gold stocks is not entirely dependent on the price of physical gold, with other external factors, such as management or investor sentiment, capable of influencing valuations.
- Gold Options
Gold options are derivatives that have either physical gold or gold futures as the underlying asset. Like futures, gold options give investors the right to buy or sell a given quantity of gold at a pre-set date and price in the future. But unlike futures that are obligatory, gold options give investors the right, but they are not obligated to exercise the right. Options are very convenient and contracts can be bought for smaller amounts, but they are also leveraged and can result in higher than anticipated losses when your prediction is wrong.
At AvaTrade you can trade Gold online, smoothly and effortlessly. Try Gold trading with the leading regulated broker and enjoy the following benefits:
- Trade gold with competitive spreads
- Amplify your trades using leverage of up to
- Trade on the powerful MetaTrader 4 or MetaTrader 5 platforms
- Enjoy trading Forex and commodities on the same platform, and hedge for risk management
- Trade on both rising or falling markets – go long or go short
- Trade any time you like, with our unique app AvaTradeGO
- Get 24/5 personal customer support, in your language
- We also provide access to a free paper trading account you can practice on before investing real money, and a trading positions calculator for you to evaluate your possible trade outcomes.
- MT4 Symbol – GOLD
- Exchange – NYMEX
- Trading Hours – 23:00 – 21:59
- Increment: 0.01
- Minimum Trade Size: 1 ounce
Why is Gold a Safe Haven Asset?
A safe haven asset protects investors during times of market turmoil or extreme volatility. At the very least, safe-haven assets ensure capital preservation during uncertain times. Gold has for a long time proven its safe-haven credentials, maintaining or increasing its value during times of turmoil when practically all other assets decline in value.
A major reason for this is that gold has held its aesthetic value since ancient times. Its physical characteristics have always amazed man – it is malleable, practically indestructible, and very rare. Gold also has a limited supply, unlike fiat currencies which can easily be printed by underlying governments or central banks. There’s only a finite amount of gold that will ever be mined, and even when new deposits are discovered, it takes a few years from exploration to eventual production.
As a safe-haven asset, gold protects investors during times of crisis and not necessarily during times of normalcy when investors are high on confidence. Even so, it is important to understand how to trade gold when there is market instability. It has been observed that gold works as a safe haven asset for a limited time during crisis times until investor confidence starts to return or volatility starts to decline. This means that investors can buy gold in crisis periods when there is extreme volatility and then sell it a few days later when volatility returns to normal. In this way, investors can, at the very least, protect their capital from extreme market fluctuations; but they can also earn returns during a market downturn. This also means that gold can act as a portfolio diversifier- ensuring that the overall risk of a portfolio is reduced without limiting the potential returns.
The History of Gold
Gold has always had an allure. Dating back to prehistoric times Gold was one of the very first metals to be mined. It was in such high demand that even the Egyptians began mining it in 2000 BC. Throughout history many civilizations chose Gold as a reliable and universal form of money for trading goods – a great store of wealth that would never disappear and could be easily transported. Before currencies, as we now know them came to be, The Gold Standard was the monetary policy whereby currencies were backed up by physical bars of Gold, kept in a reserve. If a country wanted to increase their money supply, they would have to also increase the amount of physical Gold as part of the Gold Standard. This wasn’t very practical and was eventually abandoned by the United Kingdom and indeed the entire British Empire when World War I began. Most other countries also followed their lead and abandoned it over the course of the 20th century.
Why Trade Gold with AvaTrade
You can join AvaTrade today for as little as and start trading gold and other metals too. You will get access to a range of educational tools, advanced charting packages and other benefits that are exclusive to AvaTrade clients. We offer a range of trading platforms suitable for all levels of trader, including automated trading solutions. We are sure you will find the trading environment that suits your style and financial objective.
Gold CFD Trading
Gold trading with AvaTrade does not need to be complicated, especially if you already have some experience of the online trading market. Gold units are measured in Troy Ounces against a currency – usually the dollar – in a similar way to a Forex currency pair. This means that every dollar will be worth a certain amount of Gold. The price of Gold fluctuates depending on a variety of factors, which we shall look at below. It is worth knowing what moves the price of Gold, because of course, you can look for these drivers and potentially understand which way the price of Gold will move. There are many advantages to trading Gold as a CFD rather than purchasing it outright.
- These include the benefit of not having to transport the physical Gold and then not having to store it. Highly impractical, Gold in large quantities can take a lot of space and having bars of Gold lying around in your front room doesn’t feel very safe.
- When trading Gold as a CFD, you can use the facility of leverage. This means that you can multiply your available funds, so they are effectively worth more in a trade. Leverage can multiply rewards, but be advised that it can also increase your risk.
- Gold CFDs are also the cheapest way to trade the commodity. AvaTrade offers low, competitive spreads when trading gold, as well as other metals. There are no other hidden fees or commissions, and in some countries where CFD trading is taxed, the cost of gold trading may be tax-deductible.
- CFDs are generally very liquid products, and you can buy or sell any amount of gold at any given time. This makes trading gold CFDs very convenient for all types of investors.
- Gold CFDs are very flexible; they have no expiry dates or price decay like in futures or options. You can also implement various trading strategies, such as scalping or hedging when trading Gold CFDs.
- You can use our AvaProtect facility, which is a way to manage your risk when trading Gold. Much like taking insurance, if your trading loses at the end of the duration you set for your AvaProtect contract, your capital will be reimbursed (minus the small AvaProtect fee itself).
- At AvaTrade, you can also utilise various trading resources, such as the Economic Calendar, Trading Central, and AvaSocial, to enhance your gold trading activity with as minimal risk exposure as possible.
Finally you can trade options on Gold here at AvaTrade. That means you will purchase either a CALL (UP) or PUT (DOWN) option, using our AvaOptions platform. You buy the option at a particular strike price. If the price of Gold goes above the strike price before your CALL options contract expires then your trade may be successful. Likewise if the price of Gold goes below the strike price before the option expires then you can lose your premium.
Fundamental Factors in Gold Trading
The history of gold has seen investors consider various fundamentals when trading the asset. Granted, gold has limited intrinsic value, but it is a rare metal that humans have throughout history attached massive value to. The shifting perceptions are based on a wide range of issues, all of which have contributed it its price volatility.
Here are some of the fundamentals to be considered when trading gold:
- Supply and demand
Most of the global demand comes from jewelry production and manufacturing (50%), and investment purposes (40%). Increased demand with low supply can increase the price. On the other hand an oversupply, with weak demand can drive prices lower.
- Market sentiment
Political uncertainty and/or instability contributes to global growth uncertainty and can help in the rising prices of Gold. Gold has always been considered a ‘safe haven’, which is traditionally used to preserve capital during periods of high inflation or economic downturns. That means when markets are shaky or uncertain, investors often run to the safety of gold. This of course can push up the price, and vice versa.
- Currency movements
The US dollar is a strong influencer. This is mainly because the commodity is denominated in the world’s reserve currency. Typically, when the value of the USD strengthens, the price of gold will tend to fall; and when the USD weakens, the price of gold will tend to rise. Investors can track the relative strength or weakness of the U.S. dollar by watching the U.S. dollar index. That is, the index rises when the USD strengthens and falls when the currency weakens.
- Central banks are major players in the supply and demand of gold. They are significant holders of physical gold, and they have continued to boost their reserves in recent years. When central banks increase their reserves, they limit supply in the market, which consequently boosts the price of Gold. Conversely, if a country decides to sell gold and floods the market, of course, this will impact the price of the asset by dropping its value. The influence of central banks goes beyond buying and selling the physical commodity. Central bank tools, such as setting interest rates as well as monetary policies, like quantitative easing, can influence underlying global economic conditions, which can, in turn, drive gold prices.
In addition to fundamentals, gold prices are influenced by technical factors such as:
- Long-term Trends
Gold is a commodity that trends strongly most of the time. This makes it the ideal asset to implement trend following and breakout strategies. The metal tends to trend strongly when prevailing prices breach 6-month highs or lows. For instance, the gold market will be said to be strongly bullish when the monthly closing price is at the highest level in 6 months.
Volatility is the severity of price movement in the market, or simply the degree of price fluctuations. Volatility is best tracked or measured using the ATR (Average True Range) indicator. Typically, when the daily ATR is above the average for the past 15 days, more volatility is expected in the metal, making it attractive for day traders.
- Trading Times
Gold is fairly liquid practically at all times. But it usually posts the widest price ranges during the start of the London session (07:00 hrs GMT), and even more volatility when the New York session opens at 1200hrs GMT. The overlap of the London and New York markets (1200hrs – 16:00 hrs GMT) is a particularly good time window for day trading gold because of high volume, liquidity, and volatility.
Bear in mind, that trading in this market, like any other can involve risk and you should never invest more than you can afford to lose.
Here are a few tips for trading gold:
- Gold is compared to the yen since both assets fall into the category of a “safe haven instrument” and they can potentially move in the same direction. Often, you can check your trade set-ups by comparing the two.
- Focus on the behavior of the price and keep in mind that commodities can move more than currencies.
- Use fundamental analysis to identify high probability trade setups in the market.
- Beware of rollover fees when intending to hold gold trades overnight.
- Use trailing stops to lock in profits because gold is a strong trending commodity.
- The most popular Gold exchange rate is the XAU to USD rate. XAU is the trading terminal’s code for Gold.
Gold Trading Main FAQs
- Is it still worth it to trade gold?
Gold has been used as a medium of trade and a store of value for thousands of years, and trading gold in the 21st century is just as relevant as it’s always been. Gold remains a valuable store of value, with many investors using it as a hedge against financial crisis, inflation, and geopolitical risks. As one of the largest and most liquid markets in the world, the gold market offers traders huge opportunities. Prices can be volatile, but the market is rational, which makes trading gold an exciting and potentially profitable endeavor.
- Is gold the best precious metal to trade?
Gold is definitely the most popular metal for both investors and traders, but if you’re looking for a precious metal with a bit more “pop” then silver is also a very good choice. That said, gold is often easier to forecast since it is primarily used as a safe haven asset and a store of value. Unlike silver and the other precious metals gold does not have any large industrial use, so it has fewer factors impacting its movement. Plus the huge liquidity makes the market accessible.
- What is the best strategy for trading gold?
To trade gold successfully there are many strategies that can work. Of course if you can follow the professionals, the so called “smart money”, you’re likely to have a better chance of success. One method they use is to focus on the seasonality of gold. Historically gold makes it strongest moves in September. It is also strong in the first two months of the year. So these are the best months to look for a long setup. Conversely gold is weakest in March and October, making these good months to look for pullbacks in the market.
Are you ready to start trading gold today?
Start trading gold at AvaTrade and enjoy the benefits of trading with a regulated, award-winning broker!