Trading Gold: How To Get Started

The price movements in the gold market can be very lucrative investment options for traders. Typically, there are two key ways to take a position on the future price movement of gold markets: Gold investing and trading. 

Investing in gold is essentially taking ownership of the asset right away and earning profit whenever the metal’s price rises. But when you trade gold, you don’t exactly take ownership of the asset but rather you take a position on the underlying rise and fall in price.

You can explore many different types of gold assets to trade or invest in, which will be determined on whether you are interested in the physical asset or not. Some options are:

Gold bullion

Gold in its physical form such as coins and bars is very popular as a store of value. Both individual investors and banks invest in gold bullion. However, since the safekeeping and insurance requirements can turn out to be very costly, active investors may often shy away from buying the metal directly. 

Spot gold

The spot price of gold refers to the value one has to pay to buy it upfront or on the spot. Typically it is the cost of one troy ounce of gold. Trading spot gold is one of the very popular ways of gaining exposure to bullion without having to directly own the metal. 

Gold futures

Futures contracts allow you to exchange gold for a fixed price on a pre-decided future date. You will be obliged to keep up your end of the deal either through a physical or cash settlement. Futures contracts have been standardized to maintain quantity and quality. Market forces come into play only to impact the price.

Gold options

Options contracts work in the same way as futures, but with no obligation of execution when buying. Options give you the right to exchange either physical gold or gold futures at a specific price on a specific date. Call options to let the holder buy the precious metal, and put options let the holder the right to sell it. 

Gold ETFs

Exchange traded funds (ETFs) are known to trace the movement of a rather large group of shares of publicly traded gold mining, refining and production companies. ETFs are a great way to diversify your portfolio as they allow you to gain better exposure in the market than what a single position would allow. Remember that ETFs are passive investments. They replicate market returns rather than trying to outperform them. 

Gold stocks

If you want to gain some indirect exposure to gold, trading or investing in gold stocks can be an option for you. It exposes your trade to every element of the gold industry, from mining and production to funding and sales. Do note that gold stocks don’t have the same movement as bullion. Share prices are affected by a number of different factors. 

What moves the price of gold?

Being one of the most ancient currencies on the planet, gold is deeply engraved into the financial world. Almost every individual has an opinion about this metal which in turn responds only to a particular number of price factors. Every single factor plays a key role in the metal’s market sentiment, volume, and trend intensity:

  • Inflation and deflation
  • Greed and fear
  • Supply and demand

Market players often end up exposing themselves to greater risks by reacting to one such polarity while in reality, another aspect is responsible for the price movement. Let’s understand this with an example. Say a selloff hits financial markets globally, and gold prices soar. Many traders tend to believe that it is actually fear which is causing the movement and that investors riding high on emotions will inflate the prices further. But it is very likely that in reality, inflation might have caused the stock’s decline, where the technical crowd will begin to sell aggressively. 

These forces tend to always work in tandem in world markets, setting up long-term themes that simultaneously trace uptrends and downtrends. For instance, the Federal Reserve (FOMC) economic stimulus that began in 2008, did not affect gold rates in the beginning. This is because the market players emphasized greatly on high fear levels while coming out of the year’s economic slump. As a consequence, this quantitative easing made way for deflation, which caused the gold market and other commodity groups to undergo a solid reversal.

Trading vs investing in gold

You may wish to trade gold if your aim is to: 

  1. Speculate on the rise and fall of gold prices
  2. You want to take advantage of your exposure
  3. Take shorter-term positions on gold
  4. Hedge your portfolio
  5. Trade but not take ownership of the underlying asset

You may choose to invest in gold if:

  1. You’re keen on buying and selling gold stocks and ETFs
  2. You’re looking at long-term growth
  3. You want to diversify your portfolio
  4. You want to own the underlying asset
  5. You want to gain voting rights/ dividends

Reading the charts

It will help you in the long run to learn the gold chart thoroughly. It comes with a century-long history and thus you will need to assess the trends closely. While it is important to know what the dominating trend has been like over the decades, you should have a fair understanding of what led to the metal’s low points where investors did not make profits. Strategically speaking, such an analysis comes in handy in assessing price levels that you should be on the lookout for, in case gold rates go back to that position. 

In the first quarter of 2016, gold rates went up by 10% for its largest ever quarterly gain in three decades, as of May 2022, it’s trading at $1,882 per ounce.

Open your first trade

You can trade in a number of gold markets such as spot, futures contracts, and options. You may even choose to gain indirect exposure to gold via company stocks and ETFs.

Irrespective of which gold market you choose to trade, first determine whether you’ll go long or short, what would be your position size and how much appetite for risk do you have. 

The gold price keeps fluctuating all day, hence a price put out today will most likely be inaccurate tomorrow.