How to Trade Gold? What Affects Gold Prices?
Interested in gold trading? The value of gold fluctuates from moment to moment and that’s why it is indispensable to know how it works. Let’s get to know more about gold trading and what affects the prices…
1. Gold Trading: Know the Basics
Gold is one of the most traded commodities in the world but also the most challenging one to manage. Gold is sought after not just to make jewelery but as an investment option or manufacturing of certain electronic and medical devices. The gold market offers high liquidity and opportunities to profit because it holds a unique position within the economic and political systems across the world.
Trading gold in online markets allows investors to make profits from either the daily movements or long-term trends. Today, gold trading has evolved to an extent that you don’t even have to own anything physically as there are many options to do so. As far as the profit and loss are concerned, it is determined by the change in the gold price during the contract duration.
2. How to Trade Gold in Easy Steps
There are so many ways to trade gold and the most popular options include stocks, futures, ETFs, options, CFDs, or physical trading with Bullion. In the past, if you wanted to invest in precious metals, the only way was to buy and store them. This means that you needed a safe storage space if you had to make a large investment. However, everything has evolved now and you don’t even have to keep anything with you.
You can either choose to buy physical gold in the form of bars and coins or go for high-purity gold through ways like…
a. Exchange-Traded Fund (ETF): An ETF is a mutual fund scheme under which you invest in gold through your Demat account. Gold ETFs are listed and traded on the stock exchange and has several advantages such as tax benefits, liquidity, safety, etc. You don’t get gold in physical form but it is held in paper form, just like stocks and you will get units for your holding.
b. Equity-Based Gold Fund: Though these funds invest in the international market and often deal with companies engaged in extraction or mining of gold, you can invest in them. The equity-based gold fund doesn’t require a Demat account and also not subject to the securities transaction tax. However, this option is recommended to investors with a high-risk appetite.
c. Gold Commodities: The demand for gold is so high in many countries that they import it in huge quantities which means a huge amount of foreign exchange is spent in buying gold commodities. These may include agri-based commodities, energy, base metals, precious metals, investment options, future market, commodity stocks, mutual funds, and ETFs.
d. Gold Certificates: These are similar to the first paper banknotes and act as proof of gold ownership. Issued by certain banks, the gold certificates will represent a quantity of gold bullion or coins you have.
e. Gold Futures: This is a contract agreement for the delivery of Gold at a certain time in the future but at a preset price. This option can be great if you want to manage your price risk and the futures contracts can be traded at centralized exchanges.
Here are some simple steps to start trading gold…
Step 1: Choose the Right broker: There are many options for gold traders and investors but first, you will need to find the right broker. It is good to trade with an authorized broker and open multiple types of accounts such as a CFD (Contract for Difference) trading account.
Step 2: Know Your Trading Hours: If you choose the best trading hours, you are more likely to enjoy profits. The gold price fluctuation largely depends on the demand for gold at a specific point in time and you need to find the times when the price is likely to move directionally.
Step 3: Follow a Trading Strategy: If you want to know where the market could move next and analyze the price fluctuations, use a trading strategy. You can consider fundamental analysis, or technical analysis to understand the gold market and how it works.
3. What Affects Gold Prices?
Gold has always been a popular form of investment but before you sign up for a gold trading account, it is important to understand what affects gold prices.
The following are some common factors that influence gold prices…
1) Demand and Supply: Just like any traded commodity, the price of gold depend on its demand and supply. Though all the gold mined till now is still available in the world, the amount mined right now is not very high. This is one of the biggest reasons that when the demand increases, the price increases as the supply is quite scarce.
2) Inflation: Inflation can have a great impact on gold prices as well as the price of goods and services. Rising or higher levels of inflation tend to push the prices of commodities higher including gold. Though inflation is s sign of economic growth and expansion, when it rises the value of the currency decreases.
3) Interest Rates: Gold prices have an inverse relationship with interest rates as they have a direct impact on demand and supply. When the interest rates fall, people tend to break their deposits and invest in gold leading to an increase in demand. When the demand for gold increases, so are the prices and vice versa.
4) Currency Movements: Any fluctuations in the currencies, especially the U.S. Dollar, affects the gold prices. Most of the time, a falling U.S. dollar pushes the gold rates to the higher side as other commodities across the globe also increase in value when the dollar falls. Similarly, a rise in the U.S. dollar has an inverse impact.
5) Economic Data: The U.S. economic data also have an impact on the gold prices and this may include wage data, jobs reports, manufacturing data, GDP growth, etc. Most of the time, a stronger U.S. economy tends to push the gold rates lower while a weaker economic growth can lead to an increase in gold rates.
6) Monetary Policies: Monetary policy has the biggest influence on gold prices and these policies are controlled by the Federal Reserve. When the opportunity cost of forgoing interest-based assets is low, gold becomes an attractive investment option. Investors tend to consider gold as a good option as a higher return is expected.
7) ETFs: Any actions of Electronic-Traded Funds (ETFs) can also influence on gold prices. ETFs allow for increased liquidity and the gold price can be affected by the purchasing and selling activity of ETFs. ETFs are basket funds which means you can distribute your risks over a large number of assets.
4. What Factors You Need to Consider to Trade Gold in 2021
Many investors often fail to take full advantage of gold trading as they don’t pay attention to some important factors. Here, we’ve discussed some factors that you may need to know before trading gold…
a. What Moves Gold: Gold has deep roots in the financial world but its price reacts to several factors that you need to understand. Some factors like supply and demand and inflation and deflation, etc affect the gold prices, and knowing them will help you understand the market.
b. Understand the Crowd: There are many investors in the market and understanding them will help you better allocate your resources. You may consider the long-term players like gold equities, options, and futures, etc as they are rarely affected by downtrends.
c. Check the Charts: Take some time to learn the gold market trends as this will help you know the price fluctuations. Gold price charts can be useful in several ways especially when you are planning to invest for the long-term.
d. Know Gold Trading Strategies: Though there are countless gold trading strategies that you can use, the gold/silver spread and gold-stock pairs are the two most popular ones. The gold/silver spread is ideal for longer-term traders while the other one is good for short-term investors.
e. Take a Long-Term View: As gold is a volatile asset, it is subject to price swings and that is why you need to take a long-term view. This precious metal has a long trading history and long-term support will help you know where it is heading next.
f. Best Ways to Trade Gold: Just like other investment options, no one method is best for every person. Some of the popular gold trading ways include Bullion, CFDs, Options, Futures, Shares, ETFs and, Mutual Funds.
5. The Final Thought
Gold is a popular metal that is not only used to make fine jewelery but also considered as an investment option. While gold has been living up to its standards for years now, the fluctuating rates have made it a bit risky investment. There is no definitive profit calculator for trading gold and that’s why the trading results vary depending on your overall plan.
So, make sure you understand everything before trading gold…