A Basic Guide to Gold Trading Online
Since time immemorial, precious metals such as silver and gold have been traded and recognised for their high value. Even today, these metals have a firm place in any serious trader’s portfolio. Gold is a great choice as an investment, however it can be a volatile market so finding out more about how investing in this commodity works is important to the success of your trading venture. In this article we look at the best ways of trading gold online and the advantages and disadvantages of doing so.
The History of Gold Trading
For centuries, humans have treasured and valued gold and in fact it has been used for commercial activities since the time of ancient Middle Eastern civilizations more than 2,500 years ago. Gold is the oldest form of currency that is still recognised in the world today. It has a long record of retaining its value through natural disasters, wars and even the rise and fall of empires and it is usually acknowledge as the perfect asset to be a safe haven investment. Although the value of gold has been maintained for centuries, the interest of investors has risen and fallen over the last few years. Between the 1980s and early 2000s, traders had little interest in trading gold as the stock market was flying high and economic growth was strong and stable. This kept the value of gold between around $300 and $500 per ounce for around 20 years until interest began to grow throughout the 2000s until the Great Financial Crisis of 2008 caused explosive interest in the market. The price of gold rose dramatically to its highest point of more than $1900 during 2011.
Why is Gold a Good Investment Choice?
Gold is possibly the most lucrative of all the precious metal trading options because of its unique properties. It is incredibly durable, resisting corrosion and rusting, as well as malleable, and it also acts as a conductor for both electricity and heat. It can be used for numerous industrial applications, for example in electronics and dentistry, however it is best known for its use as a base for jewellery and as a kind of currency.
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Gold’s value is determined 24 hours a day on almost every day of the week by the market. Predominantly, gold trades are based on current market sentiments rather than by supply and demand, since newly mined supply is always hugely outweighed by the amount of hoarded, over-ground gold. For this reason, why those who are hoarding gold decide to sell, the price of the commodity will fall, whereas when they choose to buy, the new supply is rapidly absorbed leading gold prices to rise ever higher.
There are numerous factors which account for increasing desire to invest in gold:
- Concerns over instability in traditional banks – If political stability in a country is threatened or there are problems surrounding the money or banks within a nation, gold is always the first option investors turn to when they are looking for a safe way to preserve the value of their investment.
- Inflation – if the property, bond or equity market rates of return have a negative outlook, it is common for people to turn to gold instead as an asset that is sure to maintain a high value.
- Political Crisis or warfare – when the world is plunged into chaos with political upheaval or warfare, people choose to hoard gold as a way of protecting their life savings. In this way they can carry and store their savings easily or use them to trade for transport, shelter or food.
- International Liquidity – Precious metals like gold offer good international liquidity value, making it easy for the holder to sell their investment in any region of the world. There is always someone who is willing to purchase gold no matter where they are based in the world as its value does not depreciate.
In Which Ways Can Gold Trading be Accomplished?
There are numerous investment options open to those who wish to participate in gold trading online. Here are some of the most common:
- Commodity ETFs – ETFs or Exchange Traded Funds are accessible for all kinds of precious metals including gold. This is a liquid and convenient way of buying and selling gold.
- Mutual Funds and Common Stocks – This is a type of investment where precious metal miners’ shares are leveraged to the price movements in the precious metals market.
- Options and Futures – These markets offer leverage and liquidity to traders who are looking to make a large investment in precious metals like gold. The biggest profits can be made with derivative products, however large losses can also occur.
- Gold bullion – Gold bars and coins are large, heavy and cumbersome and therefore are only suitable for those who have a safe place in which to store them. However if an investor expects the worst or needs a portable investment, this is a good choice.
- Certificates – Certificates bring trades all of the benefits of physically owning gold without any of the difficulties of storage or transportation. However in an emergency, it is important to remember that a certificate cannot be exchanged for anything of real value.
Which Factors Affect the Gold Trading Market?
Gold is one of the oldest currencies in the world and forms the basis of the financial world, however it is affected by only a few price catalysts. These three factors are made up of polar opposite reactions which each have an impact on market volume, sentiment and trend intensity:
- Deflation and Inflation
- Fear and Greed
- Supply and Demand
When an investor trades gold in response to one polarity while its opposite pole is controlling the price action, they are facing a higher risk. For example, should a sell off hit financial markets around the world in a major way, a trader may assume that fear will move the gold market and invest in the belief that fearful emotions will carry the price higher, however instead fears of inflation may trigger a decline with other traders selling aggressively which would cause a loss. There is always a combination of these forces at play in the world’s financial markets and these establish long term themes of long down trends and up trends.
Throughout history, one of the primary determinants of the price of gold is the level of real interest rates – the interest rate with inflation subtracted. If the real interest rate is low, alternative investments such as bonds and cash bring low or even negative returns which encourages investors to seek out other ways to protect their wealth. Conversely, if the real interest rate is high, both bonds and cash produce high returns and therefore gold holds less appeal as an investment.
Other factors which have an impact are indications which affect inflation like interest rate change announcements, treasury auctions and the Consumer and Producer price indices. Macroeconomic indicators like the GDP and Unemployment Rate reveal the state of a nation’s economy which may then encourage investors to either invest in gold or otherwise.
Changes in political climate can have a major impact upon gold’s prices. Should there be uncertainty about a war or conflict, investors may perceive that investing in a country’s currency or bonds could be risky and therefore choose to move their funds into gold.
Who Invests in Gold?
Numerous investors with opposing and diverse interests are often attracted to gold. Some long term players prefer to invest in physical gold, and they add a lot of liquidity to the market while helping to keep gold stocks and futures on an even keel because they are a source of continuous buying interest at lower prices. Many institutions who participate in hedging activity are also attracted to gold , selling and buying in combination with bonds and currencies in “risk off and risk on” strategies.
How Does Gold Correlate to the US Dollar?
A major point of contention for those who trade in gold is the correlation between this precious metal and the US Dollar. The price of gold is always quoted in US Dollars and therefore it would seem logical that the assets are correlated inversely – i.e. that the values of the dollar and gold would move in opposing directions to each other. In basic terms, this means that when the dollar’s value rises, fewer dollars are necessary to purchase an ounce of gold. Alternatively, if the dollar’s value is low, more dollars are needed to buy the same amount of the precious metal. However this is not always strictly the case. Although generally speaking the correlation between the two assets is negative, occasionally, in times of great financial stress, there may be a rapid spike in the market. This is caused by traders purchasing both the US Dollar and gold as a safe haven asset at times of economic uncertainty.
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Forex Trading With Gold
Gold plays a key role in the financial market and can be traded online without the need to actually own the physical precious metal. This presents investors with an opportunity to make great profits. Trading gold online is virtually the same as Forex trading and it is usually offered by online Forex brokers. Rather than opting to trade to traditional currencies, it is possible to opt for gold trading instead.
In much the same way as trading foreign currency pairs, trading the spot metals market allows an investor to take either a short or long position in gold whilst taking a simultaneous opposite position with the US Dollar or some other major world currency. Spot gold trades globally with prices floating freely with their basis on supply and demand. Gold can be spot traded at any time of the day from Sunday night at 10 pm GMT right up to Friday night at 10 pm GMT. Although there is no central market for gold spot trading, the primary centres for gold trading online are in Zurich, New York and London. Typically, liquidity is at its highest during the period when New York’s trading hours overlap with those in Europe, equating to around 4 hours a day. Prices are fixed twice daily for gold which allows reference points to be set for intraday trading prices.
The spot gold price is quoted all over the world in US Dollars per Troy Ounce, and if, for example, a trader purchases an ounce of gold at the quoted price and sells it for a higher one, their profit would be the total difference between the two prices. This makes trading spot gold on a Forex platform almost identical to trading foreign currency pairs. A spot gold quote is read in a similar way to a Forex quote and it is represented in the same fashion. For example, in a case where gold is being traded against the US Dollar, the quote representation would be XAU/USD. Therefore, if for example the quote reads XAU/USD 800.27, the first symbol reflects one troy ounce of gold with the value of gold always being one. Therefore the price quote translates literally as one ounce of gold being equal to US$800.27.
Are There Any Disadvantages to Trading Gold Online?
While many investors believe that online gold trading is the best way to ensure a long term safe investment of their funds, there are some downsides to this financial market:
- Low Rates of Return – When compared to regular foreign currency trading, trading precious metals like gold leads to a low level of profit. This is because there is only a slight change in the price of gold over time and therefore trades must go on for a longer period in order for a significant return to be experienced.
- Appreciation Cycles – It is only during a period when paper currencies have depreciated in their value that gold will appreciate to the highest value.
- Price Correction – In the same way as other commodities in the financial markets, gold will experience a substantial amount of price correction. The disadvantage here is that if the trader does not hold onto the precious metal for long enough, those price corrections can work against them.