Make Money Trading Gold

Trading gold

In addition to being a raw material and safe haven, gold is an age-old currency that has fascinated humankind since the dawn of time. Although the precious yellow metal has not been used as a currency exchange standard since the Bretton Woods Agreement collapsed in 1971, it nevertheless remains essential in commodity trading.

However, most of the gold market is traded via financial derivatives, not with bullion. A trader actually trades paper gold, never physical gold!

What is the difference between physical gold and paper gold? What are the advantages and disadvantages of trading gold? How do I learn to trade gold? How do I start trading gold? 

Here are our answers!

WARNING

Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk.

Transactions involving foreign exchange instruments (FOREX) and contracts for difference (CFD) are highly speculative and extremely complex. As such, they are subject to a high level of risk due to leverage. Please keep in mind that CDF trading is banned in the US.

Information published on the NewTrading.io website is for educational purposes only and should not be construed as offering investment advice or as an enticement to trade financial instruments.

Understanding the Gold Market

Physical gold vs. paper gold: what are the differences?

Gold can be traded either physically or on paper. 

Physical gold refers to gold bars and bullion, coins, jewelry, and other objects. The advantage of physical gold is its tangible, palpable nature, but it involves relatively high storage costs to guarantee its security.

Paper gold, on the other hand, refers to financial derivatives whose underlying asset is an ounce of gold. It includes mainly futures, CFDs, ETFs, options, and certificates. 

These derivatives, known as paper gold, let you trade gold without physically holding it. However, derivatives present a counterparty risk since the trader relies on the issuer’s creditworthiness.

The price of an ounce of gold

One of the primary mechanisms for pricing gold is the London Gold Fixing. 

The London Gold Fixing is a process by which members of the London Gold Market Fixing Ltd set a price twice a day, at 10:30 am and 3:00 pm London time. 

This process provides investors worldwide with an unambiguous benchmark for the price of gold at those precise times.

A bidding process between the members participating in the fixing—some of the world’s largest banking institutions—determines the price of gold. Supply and demand are then compared until an equilibrium price is reached.

Outside of these fixing times, the price of gold fluctuates in line with the global market as a whole. These fluctuations are the result of transactions on the various gold exchanges around the world, such as the COMEX in New York, the Shanghai Gold Exchange in China, and the Tokyo Commodity Exchange in Japan.

Therefore, the pricing mechanisms for gold are a mix of daily fixings and real-time transactions based on supply and demand. 

Due to these atypical pricing characteristics, the price of gold can be particularly volatile at certain times of the day!

Analyzing the price of gold

Gold prices can be affected by several factors:

  • monetary policies and interest rates 
  • inflation and economic growth
  • geopolitical tensions
  • industrial demand

In addition to fundamental analysis, you can apply technical or behavioral analysis to the price of an ounce of gold.

Why Trade the Gold Market?

An uncorrelated asset
Gold tends to behave differently from stocks and bonds. Trading an ounce of gold allows you to exploit new market opportunities. As an investor, the yellow metal offers greater portfolio diversification and theoretical protection against inflation and financial crises because of its safe-haven status.

Good liquidity
Gold is one of the most liquid commodities in the world. You can buy or sell gold quickly, with good execution quality, without incurring exorbitant fees and charges, and without significantly impacting the market price.

Extensive range of prices
Gold is traded on many international markets, virtually 24 hours a day, in various currencies (although it is mainly quoted in US dollars).

A wide range of financial products
Whether through futures, CFDs, or options, top trading brokers offer a wide range of derivative products for betting on gold’s upward and downward price variations.

How to Trade the Gold Market

#1 Learn how the gold market works

The gold market is like no other. A poor grasp of the pricing mechanisms of an ounce of gold and the sometimes complex operating rules of its leveraged derivatives can have serious consequences for your financial health (loss of capital, indebtedness, risk of addiction, and so on).

So take all the time you need to understand how the gold market works before you get started and don’t hesitate to take a trading course to develop your financial skills.

#2 Build and test your trading strategy

Unfortunately, there is no magic formula for making money in the gold market. To develop a competitive edge and hope to pull down some profits, you’ll need to build your own trading system based on your personal situation and objectives.

Once you’ve defined your strategy, you can test it and evaluate its performance risk-free, using a demo account and play money.

#3 Open a trading account with a broker

Once the training period is over, you can consider opening a real trading account.

At this stage, make sure you select a regulated financial intermediary offering the derivative product you wish to use to trade gold ounces (CFD, ETF, futures, and so on).

In addition, make sure you choose a broker offering a good balance between competitive brokerage fees, trading experience, and quality of order execution.

Finally, don’t forget to set a trading budget and adequate risk management rules to help you stay in control in all circumstances!

#4 Place your first market order

You’re all set. Now all you have to do is make your first transaction. 

During this last stage, don’t forget to place a stop-loss order to limit your exposure to risk. This won’t protect you in the event of a price gap, but in most cases it will automatically cut your losses when the specified price level is reached.

Trading an ounce of gold won’t lead you straight to the promised land, but you will invariably develop valuable financial and non-financial skills in your quest, provided you always play by the rules!

author
Maxime Parra

Maxime holds two master’s degrees from the SKEMA Business School and FFBC: a Master of Management and a Master of International Financial Analysis. As founder and editor-in-chief of NewTrading.fr, he writes daily about financial trading.

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