Gold is not precious because it is rare and not found everywhere, but for the reason that it is striking, sparkling, looks beautiful and suits the body. Plus there is a cultural and traditional value attached to it in several regions and religions worldwide. Without a doubt, gold holds a special place in the history of mankind.
The trading of gold is complex and ever-evolving. It holds a significant chunk in the commodity market, and most of the traders of the stream prefer it for higher returns. Besides, when other markets are down, it is one safe-haven place where investments flow and remain secured.
Gold is considered the “safe haven” for investors due to the fact that the prices remain relatively stable unlike other assets. One way to trade gold is to trade with futures contracts. Investors can trade futures contracts at the New York Mercantile Exchange and the Tokyo Commodity Exchange.
Why do people trade in gold?
Gold trading is largely becoming an online trading asset, which depends on daily price movements. Hence, it is conducive for buyers and sellers to transact the metal based on the market fluctuations.
However, long term investments and delivery of the metal is a big profitable venture. Also, the advantage of hedging or margin is immense here, which produces chances of losing the lost ground.
Interesting, in June 1920, the price of gold was USD 257.03 per ounce. But after a period of hundred years, in November 2020, its price has reached $1,872.06 per ounce.
The price touched a year high of $2,058.40 in 2020. It shows the rate of growth and gains that the yellow metal has offered over the years. Also, the consistency of benefits is exemplary. If inflation-adjusted, the benevolence of grant gold is providing is immense, and it makes metal the most buyable entity.
Market structure of gold
As per the BCC research, the global market of the gold accounted for $ 163.9 billion in the year 2017. And with the compound annual growth rate of three per cent, it would reach $189.6 billion in 2022.
Meanwhile, despite the massive size of transactions, not many people are aware of the phenomenon of how it gets traded. The understanding is yet to settle in several trading brains. The market of gold is spread worldwide and gets traded in various time zones.
The variants of gold markets scattered over the world are connected through the arbitrage activity of convergence. It also assimilates the local gold prices.
However, as geographical barriers, there are several distinctions in gold markets. There are sundry bar standard, taxation limitations, and trade restrictions that pose some difficulties in the trading of the precious metal.
Participants in gold markets
Markets of gold have various players and participants who enable trading and transactions of the precious metal possible globally. It includes fabricators, refiners, producers, traders, investors and the end-user when we talk about its physical form. Besides, banks act as financial intermediaries that provide broader services like gold bars, offer funds for assisting with liquidity.
Other than that, there are various types of investors and official institutions which trade in wholesale markets of gold.
Wholesale gold trading
The main function of a wholesale deal of gold is to bring sellers and buyers together more frequently than ever. A relatively cost-effective metal gets sold and bought easily. Also, it serves the purpose of discovering the price hovering at various markets in distinct regions of the planet.
Depending on the condition of the market, traders seek delivery of gold in the physical form or transfer the risk. Moreover, they try to gain exposure to bigger sections of profits. The hedging of gold is another way of marking gains.
The process requires transparency in front of market players for paramount transactions. The activity inculcates the feeling of security and trust in traders. It builds confidence and affirms integrity among market players.
Intervention of the Gold Council
For making sure that all markets are complying with the markets' needs, the World Gold Council came into existence as the market development organisation in 1987. It intervenes in transactions for ensuring that trading is going on based on principles, and the best practices. Also, it makes sure that its supporting infrastructure complies by chalked out rules.
It outlines a set of a wide range of principles and rules that covers access to the market, conduct, transparency and standards of gold trading.
How does gold trading work?
Trading of gold requires a broker for trading, but before that, one needs to understand the different types of gold transactions and opportunities available in the market.
There's a lot to explore other than what meets the eyes. From forex, futures and CFDs, a plethora of options are available to commodity gold traders. Here're the majority of types:
The demonstration of ownership of a lot or the smallest quantity of gold happens through a gold certificate. It certifies the genuinity of the metal, which holds sanctity when bought in a physical form. It has the similarity with banknotes in the cash form, which is a type of contract between the bearer and the central bank that mints them.
These are also called as custom contracts which get traded OTC (over the counter). On the other hand, contracts of options and futures are stationed at central exchanges. These swaps exchange financial instruments. These contracts are usually non-standardised. Depending on a notional principal amount, the majority of swaps involve cash flows.
It is a contract between parties agreeing upon a set of the price for the commodity in the future. There is an advantage in gold futures, as they get traded on exchange platforms. Hence, there is enhanced leverage available compared to dealing in the physical form of precious metal. However, returns of investment is a subject matter of market elevation and fluctuation in rates between the day of inking the contract and the date of its expiry.
A broker or an exchange sells gold exchange-traded funds, chiefly called as EFTs. Traders can purchase a pool of commodities, including gold in it. Also, one does not need to buy other assets along with it. The costs here are comparatively low. However, its rates are associated with gold.
It is the physical form of gold, which is usually available in the form of coins or specialised bars. Their value depends on the type of bullion they are and unit weight consolidated by them. However, acquiring a large quantity of gold may appear simple, but buyers have to pay taxes, insurance charges, storage and transactions fees additionally.
Here, traders can buy and sell a small amount of gold or a fixed amount of precious metal. The gold contracts for difference come with a date of expiry. Likewise, the profits or losses incurred would depend on the alteration of prices during the period of the contract.
Gold trading in forex
In the forex market, gold gets traded as a currency similar to other trading currencies. The code of its currency form is XAU/USD. Interestingly, it gets traded against the US dollar.
If you check the news, whenever gold price surges, the dollar rate would depreciate evenly and vice-versa. So, keeping up with the latest information and updates help in drawing higher returns from the market. The upcoming analysis and trends set up for relevant results and on expected lines.
Liquidity has a unique and essential role to play in the forex in terms of liquidity. The average trading volumes of the metal in the foreign exchange market is greater than several pairs. However, it excludes USD/JPY, EUR/USD and GBP/USD.
The trading hours for gold in the forex market keeps company with other currency pairs.
Trading gold-silver ratio
After gold, silver is among the most traded precious metals in the commodity market. Generally, traders are curious to know about what is a gold-silver ratio, even when they know the might and volumes both have while trading them individually.
It is the amount of silver spent to purchase an ounce of gold in the financial market. For example, if the price of one ounce of gold is $5000 against $100 of silver, then the ratio would be 50:1.
Notably, any trader or investor who has a vast experience and ability to predict the direction of gold prices, then irrespective of the market trend, the returns for that individual will be unmatched. An unprecedented amount of returns get generated through the practice. However, silver is comparatively more volatile than gold because of the lesser purchase value.
Both silver and gold can be used to diversify the amount of precious metals held in a portfolio.
How to trade gold through the gold-silver ratio?
The trading of gold through the famous gold-silver ratio is facilitated by "gold bugs". The gold bug is a non-literary expression that is used to define people who are optimistic or bullish on gold. These gold bugs exponentially believe that prices of gold will take a hike. They perceive a threat from investing in currencies as they think the value will reduce from factors like financial policies, increased national debt, and inflation.
The trade of gold and silver is analysed through the quantities of both metals, rather than the value of dollars.
The workings of this ratio lie in switching the metal holdings when the ratio swings towards an extreme. Let us look at an example. When the ratio moves to the extreme of a high hundred, the investor or trader will buy a hundred ounces of silver for an ounce of gold. On the contrary, when the ratio moves the opposite extreme of fifty, the trader or investor will trade a hundred ounces of silver for two ounces of gold. In this way, the investor or trade will keep on accumulating metal and making profits.
Gold-silver ratio has been a popular tool for trading metals. Traders tend to trade through ratio by assigning a more extended trade to one metal while keeping a short position for the other.
Gold trading strategy
Like every other financial instrument and asset, gold as a commodity can yield treasures if strategies get applied with it. One can field disparate mechanisms, tools, techniques, dynamics and ideas in the competitive market. They all would need the backing of daily charts, technical and fundamental analysis of price and volumes. Additionally, market players would need to pay heed to what factors influence the rates of gold, like geopolitical, social, world economy and many others.
• Geopolitical reasons
Geopolitics have a volumetric pat to play in gold trading the world over. A swift glance at history would tell you that anticipation of the gold market growth depends on how politics get played in different regions of the world. If you see the US elections, gold prices were keenly witnessing which way the camel would sit. Ahead of the election outcome, gold prices had hiked. The uncertain markets find refuge under the yellow metal. So, one needs a little brushing up regarding the world economy and political factors to be able to predict.
• Variation in volumes
Demand and supply of the market sets the price of any material, including gold. Traders should look at the charts and decide when and where to invest. Most of the gold purchasers have hots for jewellery. Having known about it, investors can invest when supply and demand ratio suits their agenda. If supply rises in contrast to demand, then the price will plunge and vice-versa.
• Volatility in markets
Professional traders should keep an eye on stocks. Whenever the stock market slips or the global economy take a hit, people start investing in gold. Similarly, when the global market is enormously volatile, and fluctuations are more than usual, then gold is the safest place. But for that, one should pay heed to forecasts of securities or equities markets.
• Placement of protective stop-loss
From stopping gold prices from breaking the barrier of breaking new lows, then indicative or protective stop-loss can avert the potential impairment that may occur looking at the pattern. It is a protective shield that prevents the invalidation of trade.
Best gold brokers in the market
For trading gold, one needs to pick up only verified and genuine online brokers that have a registration number, licensing in a country and regulatory body looking after their activities. Rest of the factors are manageable.
Some brokers that are sporting conducive environments for gold trading are IGMFX, TradedWell, ETFinance, 2invest, InvestLite, ROinvesting, 101investing, Brokereo, Oinvest and many others.
All the brokers mentioned above are well funded and rated. They have a regulating body above them and charge a reasonable amount on transactions. Traders can draw benefits through technical indicators, tools and sundry charts available on these brokerage firms.
Usage of freely available tools is recommended to beginners. Also, they must first take their hands-on demo accounts offered by brokers to get accustomed and acclimated to a new broker after registration. A trader can arrive at a decision on the continuation with the brokerage services for gold trading.
Best platforms for gold trading
There are many platforms in the market that deem fit for gold trading, but MetaTrader4 and MetaTrader5 are the best. Both are quick and packed with multiple functions and facilities that assist in trading by offering an indication of price movements. They are accessible and compatible with most of the traders.
Advantages and disadvantages of gold trading
Like life, there are ups and downs, highs and lows, profits and losses, and advantages and disadvantages associated with gold trading. The malleable metal requires the guidance of experts and trade pundits for a larger scheme of things and drawing advantage from the jaw of disadvantage.
• Traders can hedge against inflation.
• It retains the purchasing power compared to other assets.
• Gold stands the ground during global instability when other instruments and assets dwindle.
• People can trade it with a wide range of trading instruments like gold futures, gold bonds, e-micro futures stocks and others.
• It is highly volatile, so keeping a close look may not suffice all the time.
• Gold trading may offer bigger returns, but it comes at the cost of risking massive funds.
• One can predict where gold prices would be after seeing its day's trade, unlike other commodities or assets. A day's trend does not reflect where the price may head toward the next day.
• While trading on gold ETFs, one may have to spend on fee charges.
• Gold trading has sizable liquidation spreads.
Gold trading is for those who are ready to take some perils while seeking heavy returns. Also, anyone who has extra funds for hedging when the market is dilapidated should think of investing here. However, it is safe for long-term investors. Perhaps, looking at the historical figures, over the years, rates of the precious yellow metal have only surged.
In times of Covid-19 pandemic (coronavirus), the prices of gold rushed upwards. When the economies of the world drowned, investors once again sought refuge in the malleable metal.