To be successful in gold trading, like in MetaTrader 5, you must understand how the market runs. Also, you have to consider the right investment vehicles. Therefore, it is important to learn the various aspects of gold trading and know when and what to invest in.
So, if you want to understand how to start trading in gold, read on.
A General Overview of Gold Trading
Gold trading is slightly different from investing in gold. However, both involve acting as per future price movements of the gold market.
For instance, if you invest in gold, you start owning gold as an asset. Hence, as the price of the metal rises, you make a profit from it. However, when you are trading in gold, your position depends on the rise and fall of gold prices. Here, you do not directly own any gold physically.
So, if you want to invest or trade in gold, you need to have a better understanding of the major gold assets. However, you need to decide beforehand whether you want to invest in a physical asset or not. Here are the major gold assets you can invest in or trade:
1. Gold Bullion
Both individual investors and banks use physical gold as a store of value. Generally, this gold comes in the form of bars and coins. However, once you buy gold bullion you have to put up with the cost of insurance and storage. Hence, many investors do not consider buying gold outright.
2. Spot Gold
If you want to buy gold, you have to incur a cost upfront. This is called the spot price of gold. Basically, it includes the price of one troy ounce of gold. Therefore, if you want bullion exposure, you must start trading in spot gold. Meanwhile, you do not need to worry about owning gold.
3. Gold Futures
Once you buy futures gold contracts, you exchange gold for a fixed price on a future date. Here, upholding the end of the deal is an obligation, where you must make a cash settlement or a physical settlement in the end.
One of the best things about futures contracts is that it offers both quantity and quality. However, the market force is the driver here.
4. Gold Options
Gold options contracts are quite similar to futures contracts. However, you do not have any obligation for trade execution after you buy a gold option. Basically, with the help of options, you can exchange either physical gold or gold futures contracts on a specific date at a specific price.
5. Gold ETFs
A gold ETF tracks the movement of a basket of shares of a gold mining, refining, or production company that has gone public. Hence, if you buy gold ETFs, you get a wider exposure than what you get from a single position of investment. Therefore, investing in an ETF is a great way to consider if you want to diversify your portfolio.
6. Gold Stocks
Gold stocks give you indirect exposure to gold. For instance, gold stocks offer you exposure to many aspects like mining, production, funding, sales, and more. However, the prices of gold stocks do not move like gold bullion. This is because a lot of factors impact its prices.
How to Start Gold Trading? – Steps to Follow
You can start gold trading easily by following the steps below:
1. Understand the Factors that Impact Gold Prices
Generally, there are three market forces that drive the prices of gold. Apart from that, these forces also influence market behavior, trading volume, and trend strength. Here they are:
Inflation and Deflation
When there is an inflation in the economy, the prices of gold increase. On the other hand, during deflation, gold prices are initially suppressed. However, as investors start considering gold as a safe haven, the prices of gold start to increase.
Market Sentiment
During geopolitical issues and economic instability, the prices of gold increase. Apart from that, factors like greed also impact the prices of gold.
Supply and Demand
The supply and demand of gold also impacts gold prices. For instance, during the pandemic, gold mining got disrupted. Hence, a tight supply of gold led to an increase in prices.
2. Know About the Major Market Players
Traders with competing interests work in the market. For instance, there are “gold bugs” who are the most consistent investors in gold. Generally, they invest most in physical gold bars and coins. Apart from that, they sometimes invest in futures and stocks. Basically, these investors have a knack of holding on to gold no matter what.
On the other hand, there are “the Hedgers.” These investors use gold to manage risks of other investments in their portfolios. In fact, hedgers use gold to diversify their portfolios. Hence, the actions of hedgers have a significant impact on the prices of gold.
Finally, there are “the Speculators” who look for short-term profits from price movements. Basically, these traders do not have any long-term position on their investments. Rather, they focus on technical analysis, momentum, and trends.
Central Banks and Governments
Since central banks and governments are long-term holders of gold and use it as strategic reserves, their actions significantly impact gold prices.
3. Check Historical Prices
By evaluating historical prices, you can check investment patterns. This way, you can also predict price movements of gold in the near future. Therefore, it is important to check annual gold prices and gold returns from time to time.
Choose Your Investment Vehicle
Depending on your investment behavior, long-term goals, and your financial condition, you need to choose what type of gold you want to trade. As already explained, gold investment vehicle comes in different forms.
For instance, if you have significant capital, you can start buying gold bullion or physical gold. However, if you want to start small, you can go with gold ETFs or mutual funds.
Do you have more suggestions on how to trade gold? Please share your ideas and opinions in the comments section below.