Discovered at least 6000 years ago, gold still maintains its status today as a highly valuable metal. It is present in many artifacts created throughout history, as well as in beautiful jewelry passed down and traded through the ages.
But the value is not only tied to these feats of craftsmanship: gold has a role to play in the contemporary financial markets, mainly because it is a metal whose value is high and relatively stable over long periods of time. Because of these characteristics, it is an attractive option for investors in the capital markets.
In the past, investing in gold was limited to people with great assets and capital. Today, thanks to the rise of the internet and the creation of online trading platforms and tools, everyone can access trading from any point in the world, regardless of financial constraints.
Your options when trading gold
Gold is treated as a currency in the capital markets. You can trade it just as you would pounds for dollars, or vice versa. Depending on the price changes during the day, traders can buy and sell gold and make a profit.
Contracts of difference (CFD)
One of the options offered by retail forex brokers are contracts of difference. In this setting, traders wage on the price changes of gold, keeping the profits when their predictions are confirmed in the markets. Since the investment is put on a wager, traders will never own physical gold but may still benefit from its market.
The main advantages of CFDs are that traders can enter the market with a lower investment, in a short term position, and that they’ll save money by not paying futures or for storing physical gold.
One thing to note is that this form of trading has its risks. The market changes quickly and frequently, leading to high volatility. This can create great gains but also great losses.
Exchange-Traded Funds (ETF)
An alternative to trading gold through contracts of difference, you can also choose futures, day trading or exchange traded funds. Like CFDs, these options don’t involve owning physical gold. ETFs are a collection of investments traded like stocks and can contain securities related to gold.
Gold futures give investors some leverage when trading gold, by contracting a future date and price to sell the commodity. The amount of capital needed to invest in futures is low. After all the investor’s funds are deposited on the broker’s account, he can then conduct large-scale investments that have the potential to have a better yield when compared to trading solo.
Market Analysis
Conducting market analysis is a vital process during the trading procedure. All retail traders must familiarize themselves with how the markets work before starting any trades.
In the particular case of gold, a trader must understand what can impact the price movements of the commodity, while observing past variations and prices. One of the factors that cause these changes are tied to supply and demand.
These two forces are very straightforward. When there is increased supply and reduced demand, the prices drop; then the opposite is true, more demand and less supply, the prices increase.
Additionally, whenever the world economy points to a slowdown or a recession, traders focus on gold trading as its value is relatively stable in the long-term. The tenser the economical, social or political circumstances become, the more investors turn to gold to assure future wealth.
Technical analysis is another way to understand how to trade gold effectively. By using trading tools and historical information, traders can create projections regarding the value of the commodity. These technical traders can also recognize conditions where too much gold was sold or bought. This knowledge can provide good indicators on when to assume buying or selling positions.
Considerations
The value of the Japanese Yen and of gold have a direct relationship. It’s common to see the value of gold rise at the same pace as the Yen, and vice versa. This relationship can be explained by the fact that the Japanese economy and financial system are perceived as dependable, the same perception that investors have of the value of gold. As a result, Yen and gold are a good safe place to store value during unpredictable periods.
Another currency in close relationship to gold is the U.S. dollar. But, unlike the case with the Japanese Yen, when the dollar is performing well, the prices of gold tend to drop. Conversely, when the dollar is losing value, gold prices rise.
When deciding how much to invest in gold, keep in mind that greater investments also increase your exposure to the market conditions for this commodity. While the potential to make good profit increases when you invest more capital, if the prices drop suddenly for any reason you will accumulate losses.
When you assign over 15% of your assets to valuable metals, you may lose the potential higher returns than other property classes might yield.
(Additional sources – The origins of gold: https://www.gold-traders.co.uk/gold-information/who-discovered-gold.asp)
