The fundamentals of trading gold for profit are the same as trading other financial markets.
The goal is to spot the difference in buying low and selling high. Many experts claim how they can give you a gold trading edge, but few will remind you the No.1 rule of financial markets. Whether you’re trading a commodity or currencies – always keep your trading costs low.
Why Trade in Gold
- Investors buy gold as a hedge or a safe haven harbour during economic, political, or social uncertainty
- The gold market is prone to speculation like other markets
- The history of the gold standard, gold reserves and its pricing in relation to fiat currencies during financial crisis indicates that gold behaves more like a currency than a commodity.
Factors Affecting Price
There’re different fundamental factors which affect gold prices. Gold prices react depending on the prevailing economies, different uses, and different nations or regions of the world. Some of the factors are:
Geopolitical events: A major terrorist attack, escalation in Middle East tension or a coup in the Far East can push the price higher.
Economic recession: During an economic recession, there’s an increase in demand for gold as a hedging tool against inflation or currency devaluation.
Economic news: During credit crisis such as the 2010 Greek debt, investors chose to invest in gold as they were seeking more stability. Sometimes the price of gold moves opposite to the USD.
Interest rates: The lack of interest/dividends makes it less attractive in high-interest rates environments, and more attractive in a low-interest rate environment.
Central bank: Gold sales and foreign exchange reserve news releases.
Seasonality: Gold performs well in the run-up to religious and ‘gifting’ festivals such as Christmas, Diwali or during Indian weddings in which gold is given as part of the dowry.
Weather events: India accounts for more than a quarter of gold consumption. Most of it is bought after a good harvest, and farmers are likely to sell it after a bad monsoon or typhoon which wipes out their crop.
A gold CFD is an order to buy or sell a certain amount, and the change in the price of the gold will determine your profit or loss. The main advantage is the spreads are tighter, and you can enter or exit positions with ease no matter your trade size. Gold is a volatile market and daily trading’s of 400-point moves are common. Since it’s a derivative, you don’t need to take ownership of the metal, though you can enjoy the profits. You only need to spend a fraction of your capital to buy gold.
Gold CFDs offer the possibility to trade with leverage
A CFD trader with a leverage of 30 and 7% up move in the gold price can take a long position and make a profit of 30 * 7% =210%. CFDs offer traders the possibility to limit risk by placing a stop loss order. The stop loss order is an ongoing order that closes a position once a certain price level is achieved. For example, you go long 1 ounce of gold at a price of $1,500 per ounce with an acceptable loss max of $50. You then give a stop-loss order for $1,450. Once the price of gold hits $1,450, your position will close automatically. You can also gain profits in a similar fashion.
Some of the brokers who offer gold trading CFDs are eToro, Plus500, Markets.com, and AVAFX.
Binary Gold Trading
You will first need to open an account with a broker that offers a variety of contracts on gold before you can start binary gold trading. Here are different methods to trade different types of contracts.
Higher/Lower: This binary options method can help you to profit from strong trends in the gold market. You can place a contract to earn a payout for a rising or falling gold price by opening a contract that supports your price prediction.
Touch/No Touch: You can use these contracts to select a price level that you expect the market to either ‘touch’ or ‘not touch’ before the contract expires. A contract gives you a payout if the level is touched. A ‘no touch’ contract payout is made if the contract expires before the level is touched.
The Benefits of Binary Gold Trading
- Low barriers to entry: You don’t need high levels of capital to start trading
- Controlled risk: The gold spot price is famous for its volatility. Binary options offer limited risks which eliminate the fear of sudden price movements
- Flexible strategy: Despite gold’s reputation as a buy and hold investment, you can speculate on short term price movements. Binary options can help you profit from the price volatility in the gold market.
Some recommended binary options brokers include 24 Option and IQ Option.
Gold Spread Betting
Opportunities to profit in spread betting gold rely on finding price discrepancies between gold and market announcements. Thus in a spread market, you should move swiftly if you think a price correction is overdue. As a result, a small change in the price of gold can trigger a profit or loss since gold spread betting is highly leveraged.
However spread betting in gold will expose you to the following:
- Excessive leverage to live gold price
- A volatile investment
- Owning a financial bet instead of the actual gold
- Problems and delays in opening a spread betting account
Pros of Gold Trading
Safe Haven – Gold is considered an alternative currency or a store of value during a financial crisis.
Gold supply – It’s harder to find deposits or new discoveries and the cost of extraction is high. As a result, overall gold production rates are restricted.
Stock market – Gold provides an attractive option for investors seeking alternatives.
Dead money – Despite its shiny appearance, gold has limited commercial applications. It doesn’t earn dividends and comes with ongoing storage and insurance costs. Gold is referred to as a negative-yield investment.
Inflation hedge – The price of gold is open to high speculation, and a range of prices which may counter the benefit of fighting inflation.
Gold is one of the most volatile commodities to trade in. Its high volatility can earn you a lot of money if you are careful in your trading. It can also cost you money. Investors such as Warren Buffet shun gold as he believes it has no utility.
Gold has been used throughout history as money and has been a relative standard for currency equivalents specific to economic regions or countries, until recent times.
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