Gold is a popular commodity that investors, funds, and speculators around the world trade. It has long been regarded as a hedge against inflation and a safe-haven asset during turbulent economic times, making it an attractive investment opportunity and symbol of wealth. Despite its perceived value and stability, gold trading requires careful consideration due to its high degree of volatility.
Like all exchange-traded markets, the price of gold is determined by supply and demand. Saturation of the gold market by supply and insufficient demand can cause gold prices to fall. Conversely, if demand for gold increases without a corresponding increase in supply, the price of gold will rise.
Several key factors impact gold prices, including economic and political instability, industrial uses, new discoveries, and the US dollar. Gold is frequently used as a hedge against inflation during times of economic and political uncertainty, leading to price increases. Most gold demand comes from jewellery, technology, and investments, contributing to market stability. New gold discoveries increase its availability and drive prices in the short-term. Since gold is priced in US dollars, fluctuations in the greenback’s price can influence its attractiveness to investors.
How To Invest In Gold
Investors have several options to invest in gold directly, including buying the physical asset, purchasing shares of a mutual or exchange-traded fund (ETF), or trading futures and options in the commodities market. Institutional investors often implement investment strategies using options on gold futures.
Investors can also gain exposure to gold through the stock market by investing in gold-mining companies’ shares. As the price of gold increases, miners’ higher profit margins can boost earnings exponentially. Nevertheless, investors must consider other issues, such as political risk and the difficulty of maintaining gold production levels, particularly as many gold-mining companies operate in developing nations.
Different Ways Gold Is Traded
Investors who buy precious metals as a hedge against inflation and stock market crashes tend to buy physical gold in the form of bars, ingots, or coins. Physical metal is straightforward to buy and sell and is considered a low-risk asset as it operates outside the banking system. However, owning physical metal requires that you arrange safe storage and pay storage costs.
If you invest in gold through a trading account, you can trade gold spot or futures. Gold spot refers to the price that the precious metal can be bought and sold for immediate settlement, rather than a date in the future. Gold spot traders use technical analysis to determine the entry levels to buy and sell the metal. Gold futures contracts allow investors to speculate on the future price of gold. These contracts trade on commodity exchanges and under the contract, the buyer agrees to take delivery of a specified amount of gold at a certain price on a set date in the future. The three main regional markets for gold futures globally are the over-the-counter (OTC) market between dealers, brokers, and banks in London, the Commodity Exchange (COMEX) in the US, and the Shanghai Gold Exchange in China.
Trading options offer an alternative to buying or selling physical gold or futures contracts directly. A call option gives the holder the right to buy gold at a set price on the date the option contract expires. A put gives the holder the option to sell gold at the specified price on the expiration date. As well as trading options with bullion or futures as the underlying asset, you can also trade options on stocks in mining companies.
Investing in mining company stocks is another option instead of investing in an asset linked to the gold price directly. Research companies involved in the gold industry and trade their stocks through your share dealing account.
Exchange-traded funds (ETFs) also offer a way of investing in gold that acts in the same way as stock trading through your brokerage account. ETFs trade on stock exchanges in the same way as individual company stocks. Gold ETFs such as the SPDR gold shares (GLD) are designed to track the gold price and are backed by physical gold. A unit of an ETF is equivalent to one gram of the precious metal.
How Retail Traders Can Profit From Gold Without Owning It
Retail traders often choose gold as a popular trading instrument. However, acquiring and storing physical gold can be a hassle, and investing without leverage may not be feasible for everyone. Fortunately, there is a way for retail traders to benefit from gold’s price fluctuations without owning the actual asset. Trading Contracts for Difference (CFDs) with gold is the most popular way for retail traders to do this.
Contracts for Difference (CFDs) are essentially temporary orders to buy or sell a pre-stated amount of gold. Profits and losses are determined by changes in the gold price while the contract is active. CFDs allow traders to speculate on the price movements of gold without having to own the physical asset.
