Complete beginner's guide - How to trade gold in 2023?

Complete beginner's guide - How to trade gold in 2023?

 

Gold is a highly liquid but rare asset, known as the most popular commodity and a safe haven for traders.

Gold has been traded for centuries due to its unique physical nature, from its use in jewelry to its high demand in the technology sector for key electronics components.

In this article, we introduce traders to the precious metal that has fascinated the world for years. We explain how the gold market works and what investment and trading opportunities there are for this commodity.  

 

Table of contents

 

·      The value of gold

·      What is gold trading?

·      How does the gold market work?

·      How do I trade gold as a beginner?

·      Different ways to trade gold

·      Different ways of investing in gold

·      Advantages and disadvantages of gold trading

·      Gold trading tips for beginners

 


The value of gold


Today, gold is used as jewelry, as an investment, in medicine and in the electronics industry. However, the precious metal has long been used as a means of payment. But what makes gold so special? Why aren't silver or palladium, for example, the most popular precious metals?


Gold has always been considered an attractive metal for its color and brilliance, and it's virtually indestructible. It's rare enough to prevent producers from flooding the market with it and driving down its value, but plentiful enough to keep the market liquid. People also have an emotional attachment to gold, which is still highly valued in many cultures today.


 

What is gold trading?


Gold is one of the world's oldest and most reliable means of payment. For traders, gold's intrinsic value - or "safe-haven" appeal - makes it a popular investment and a good way to diversify a portfolio.


There are two main ways to invest in gold. The first is to buy physical gold, or shares in a mutual fund or exchange-traded fund that tracks the price of gold in real time.

The second option is to take advantage of price fluctuations on the commodities market and trade gold-related derivatives, such as futures, CFDs, options and others. Gold CFDs and gold futures are two of the most popular gold derivatives.


 

How does the gold market work?


Gold is mainly traded over-the-counter (OTC) and on exchanges. London is the global center of the OTC market, where market players trade directly with each other. This market is less regulated and offers greater flexibility, but the counterparty risk is higher.


Exchanges are regulated platforms where transactions are centralized. They generally offer a standardized contract, which is not suitable for all operators as it limits their flexibility.


Apart from London, the other two major gold trading centers are New York and Shanghai. The COMEX exchange is located in New York, while the Shanghai Gold Exchange is in Shanghai.

 


How do I trade gold as a beginner?


For beginners wishing to buy and sell gold as a regular asset in their portfolio, different strategies and assets are needed to trade gold. Read this section to learn the basic steps to start trading gold.

 

Find a suitable broker - Gold is available on most trading platforms. Many offer a variety of trading instruments, meaning traders can trade currencies, metals, stocks, cryptocurrencies and commodities all in one place. Signing up for a live trading account is easy. If traders wish to keep their gold trading on a separate account, they always have the option of creating a sub-account through which they can trade gold exclusively.


Choose your gold trading mode - Before you start trading gold, it's important to understand the differences between the two gold products offered as CFDs. Spot CFDs generally have a lower margin than forward CFDs, but are subject to daily swap fees. The forward CFD has a higher margin than the spot CFD, but no daily swap is charged (instead, a rollover is due on expiry of the forward contract).


Start testing a trading strategy by trading gold - traders may prefer to start by doing so on a demo account. This is an important step, as it lets them know whether their strategy is compatible with gold. If they use fundamental analysis, they need to follow important news and events concerning gold, and learn more about the correlation between precious metals and other asset classes.


Launch your first gold transaction - Once traders are ready and set up in a chosen platform, they'll find the spot product under the ticker "XAU/USD" (or XAU/xxx for other currency pairs) and the futures CFD under the ticker "GC".



Different options for trading gold


Whether you want to trade or invest in this precious metal, there are several ways to trade the gold market:

 

CFDs (contracts for difference)

CFD trading is speculation on the rise or fall of prices on the world's financial markets - such as indices, commodities, equities or crypto-currencies. A CFD is a contract between an investor and a broker for settlement of the difference in value of a financial asset or instrument over the term of the contract.


If the price is higher than the opening price when the contract closes (a trade), the buyer receives a positive return. The seller must pay the buyer the difference, which constitutes the buyer's profit. Conversely, if the trading price is lower than the opening price, the buyer suffers a loss.

 

Gold futures or futures contracts

A futures contract is a contract to buy or sell a specific asset at a predetermined price at a given time in the future. Futures contracts are particularly popular with short-term traders wishing to speculate on gold price trends. They can also be used for hedging purposes: an investor who owns physical gold, for example, won't want to sell it frequently, as transaction costs would quickly mount up. Instead, the investor can sell gold short to take advantage of a downturn, while retaining his or her physical gold as a long-term investment.

 

ETFs

Exchange-traded funds have enjoyed a meteoric rise in recent years, providing an inexpensive way to invest in a particular asset. Gold ETFs may be the right choice for investors who want to invest in gold while keeping transaction costs to a minimum.

 


Different ways to invest in gold


Gold coins

Gold coins are still very popular. The five most popular gold coins are the Krugerrand (South Africa), the American Eagle (USA), the Canadian Maple (Canada), the Australian Nugget (Australia) and the Chinese Panda (China). The disadvantage is that these coins are always sold at a premium, and investors have to store them accordingly, which can entail additional costs (e.g., by buying a safe deposit box or renting one from a bank).

 

Gold bars

Gold bars are available in various sizes. Premiums are slightly lower, and the market for gold bars is more liquid than that for coins.

 

Gold mining shares

Shares in mining companies can be traded or invested in the form of individual shares, CFDs on shares or ETFs made up of a portfolio of mining companies.

 


What factors influence the price of gold?


Many factors can influence the price of gold, but the most important are as follows:

 

·      Geopolitical developments: The precious metal is generally regarded as a safe-haven asset, and prices tend to rise in times of geopolitical tension.

·      Inflation fears: When investors worry about rising inflation, the value of gold generally rises, as it becomes less and less attractive to hold cash.

·      Monetary policy: Gold and the US dollar have an inverse relationship. Consequently, expectations of a rise in US interest rates will strengthen the dollar and put pressure on gold. If, on the other hand, US interest rate expectations fall, the US dollar could fall, while the price of gold would rise.

·      Physical supply/demand: Buying exchange-traded gold funds or trading CFDs and gold futures has become very popular, but physical gold is still used for jewelry and investments (e.g. coins and bars). Demand for these products will also have an impact on the price of gold.

 


Benefits of gold trading


In this section, we'll find out why it's important to trade this crisis-proof precious metal.

 

In the past, gold was a good hedge against inflation. Inflation is an investor's number one enemy. In times of turbulence, when the stock market is struggling and cash is losing value due to low interest rates, gold can become an attractive asset class for investors.


Although the price of gold fluctuates and is sometimes highly volatile, the metal has retained its value over the long term and is therefore considered a stable investment.

Gold is highly liquid, meaning that buyers can easily find sellers in the market and vice versa. This is important, as it reduces transaction costs and reassures traders and investors alike. Even the physical gold market is liquid, as it is not difficult to find a buyer.


Gold is an excellent means of diversification. It can outperform the stock market during certain periods (for example, when overall risk sentiment is low).



Disadvantages of gold trading


If traders own physical gold, storage can be complicated and costly, depending on the amount of gold they own. Safes and vaults are not cheap.

What's more, gold is not remunerated. If traders hold certain shares, they can pay them a dividend. If you hold cash in your bank, you can earn interest. But gold earns nothing.

 


Tips for beginners before starting to trade gold


Before starting to trade gold, traders need to understand the characteristics of this asset class, its correlation with other trading instruments (such as stocks and bonds) and whether it is suitable for their trading strategy.


Once traders have decided when to start trading gold, they need to find the product best suited to their trading style and strategy. Some traders will benefit from the CFD spot product, which has lower spreads, while others will prefer the CFD futures product, which has higher spreads but no daily swap fees.


Once they've determined which product suits them best, they need to check how well their strategy works when trading the asset in question, ideally in a risk-free demo environment. Depending on their trading style, they may find gold's volatility too high or too low.