Gold Trading: What Factors Do Investors Consider in 2020?


Start Trading Gold Today With CFDs
Disclosure: Your support helps keep Commodity.com running! We earn a referral fee for some brokers & services we list on this page. Learn more...

Last Updated on

Risk Warning: Your Capital is at Risk.

Gold is one of the most traded commodities in the world. But it is also one of the most challenging because of its use in various industries and as a store of wealth. This guide will help you understand how and where to get started buying or trading gold.

In a Rush? Where to Trade Gold

If you're in a hurry to buy or trade gold online, consider these top regulated brokers and deals and read our reviews for more information:

  1. Plus500: allows you to trade gold CFDs from over 50 countries (note: CFDs are not available in the USA).
  2. BullionVault: buy gold bullion and have it stored for you at low cost in your choice of 5 locations worldwide.
  3. Forex.com: trade spot gold as well as CFDs, forex, and other derivatives.

We go into detail about these and other broker options deeper in this guide.

Or read on to why people trade gold, how it is traded, strategies traders use, and which brokers are available within .

We also answer common questions in our FAQ.

First, we'll introduce the various methods traders can use to gain access to gold financial products.

How to Trade Gold

Gold speculators have several ways to trade the commodity. This table gives a quick overview.

Gold Trading & Investing Methods Compared

Method of InvestingComplexity Rating (1 = easy, 5 = hard)Storage CostsSecurity CostsExpiration DateMgmt CostLeverageRegulated
Gold Bullion1YESYESNONONONO
CFDs3NONONONOYESYES
Futures5NONOYESNOYESYES
Options5NONOYESNOYESYES
ETFs2YES*YESNOYESNO**YES
Shares2NONONONOYESYES

Further details about each type gold financial product, and brokers and dealers.

CFD Brokers Offering Gold

There is a way to trade gold that some may find beneficial in many ways to the alternatives discussed in this guide.

Through a derivative instrument known as a contract for difference (CFD), traders can speculate on gold prices without actually owning physical gold, mining shares or financial instruments such as ETFs, futures, or options.

The value of a CFD is the difference between the price of gold at the time of purchase and the current price. In other words, the value of a CFD increases as the price of gold increases but falls when gold prices decline.

CFD traders open an account with a broker and deposit funds. The funds serve as a margin against the change in the value of the CFD.

Trading in CFDs does not require individuals to pay for gold storage or roll futures contracts forward every month. Traders also don’t have to worry about getting the timing and size of markets move correctly in order to profit on their trades.

CFDs are still high-risk financial instruments, however, and your capital is at risk so you should be an experienced trader or seek out a broker that offers a demo account to allow you to develop your knowledge in advance of risking real money.

One of the hardest parts of starting trading gold is finding a regulated CFD broker that accepts users from your country. We've done the research for you and found these options.

IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.

Best CFD Brokers For Gold – Edition

Loading table...

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.0%-89.0% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How To Trade Gold Bullion

One way to speculate on the price of gold is to hold physical gold bullion such as bars or coins. While this is the most direct way to trade gold, trading in bullion requires a secure storage facility. Ultimately, the cost of this storage could make holding physical gold an expensive proposition.

Here are some online gold bullion dealers you might consider:

  1. BullionVault.com
  2. BullionStar.com

How To Trade Gold Futures

These gold trading derivative instruments allow traders to speculate on the future gold price movements through the purchase of exchange-traded contracts.

Futures markets offer a liquid and leveraged way to trade gold. However, leverage can lead to margin calls when prices decline. Also, futures contracts come with definite expiration dates.

This requires the trader to either accept delivery of gold or roll the contract forward to the next month. In other words, trading futures requires active and onerous maintenance of positions.

Gold futures trade on the COMEX, which is part of the Chicago Mercantile Exchange. The following is a summary of the contract specifications for gold (symbol GC):

 Gold
Contract Unit100 troy ounces
Price QuoteU.S. Dollars and Cents per troy ounce
Min. Price Fluctuation$0.10 per troy ounce
Listed Contracts Trading is conducted for delivery during the current calendar month; the next two calendar months; any February, April, August, and October falling within a 23-month period; and any June and December falling within a 72-month period beginning with the current month.
Settlement MethodDeliverable

How To Trade Gold Options

Like futures, options are a leveraged derivative instrument for trading gold. However, options traders must be correct on the timing and the size of the market move to make money on a trade. Options traders may find that they were right about the direction of the gold market and still lost money on their trade.

Futures are contracts that require you to buy or sell a set amount of gold at a set price at a given date in the future. Options allow you the option to purchase or sell gold at a later time. You pay for this ability.

How To Trade Gold ETFs

While exchange-traded funds (ETFs) may seem like the perfect proxy for trading gold, traders should be aware of their considerable risks and costs. Many ETFs trade in gold futures or options, which have the risks outlined above.

As for the ETFs that trade in gold itself, these funds incur the same storage and security costs just as individuals do. Ultimately, these costs get passed on to the trader.

Finally, ETFs are financial instruments that trade like stocks. When stock markets decline, ETFs are not immune from the same pressures that drag stocks down.

Here are some leading gold ETFs (based on assets under management):

Top 5 Gold ETFs by Assets Under Management

SPDR Gold TrustiShares Gold TrustETFS Physical Swiss Gold SharesPowerShares DB Gold FundVan Eck Merk Gold Trust

How to Trade Gold Stocks

Purchasing shares in exploration and mining companies supposedly allows traders to make a leveraged bet on the price of gold. In theory, many of the costs of running a mining company are fixed. Therefore, as the price of gold increases, the additional revenues should flow to the bottom line in the form of profits. Markets assign a multiple to these profits, so in bull markets traders should make more money from owning shares.

The flaw in this argument, however, is that gold prices rarely rise in a vacuum. When the price of gold increases, usually oil and other commodities needed to run a mining company rise as well. In fact, mining shares have rarely if ever outperformed gold prices during bull markets.

Gold Explorer and Mining Stocks

Here are a few leading gold explorer and mining stocks:

Top Gold Stocks by Market Capitalization


 OverviewListingsFoundedInteresting Fact
Barrick GoldLargest gold mining company in the World, headquartered in Toronto.Toronto (TSX)
New York (NYSE)
1983Originally founded as an oil and gas company.
Newmont MiningUS gold mining company based in Colorado.New York (NYSE)1916Newmont is the only gold company in the Standard & Poor's 500 Index
Polyus GoldRussian gold mining company headquartered in Moscow.London (LSE)
Moscow (MCX)
2006The largest gold miner in Russia.
AngloGold AshantiJohannesburg based global miner and explorer.Johannesburg (JSE)
New York (NYSE)
Sydney (ASX)
2004The company has 17 mines in 9 countries.
Newcrest MiningAustralia's leading gold mining company.Sydney (ASX)1966Originally a subsidiary of the Newmont Mining Company.

To get started you can read our introduction to online stock brokers here.

Trading Gold With Forex

If you already trade on the Foreign Exchange (Forex), an easy way to get into gold trading is with metal currencies pairs. It is roughly the same as with regular currency pairs like GBP/USD (Great Britain pound — US dollar). But instead of two currencies, there is a metal and its price in a particular currency. The most common are for gold (XAU/USD) and silver (XAG/USD).

Gold Trading Strategies

There are countless gold trading strategies used to determine when to buy and sell gold. As we've discussed, gold trading is a complex venture and must be studied carefully.

However, below we outlined three of the more popular strategies: (1) follow the Japanese yen, (2) use the gold/silver spread, and (3) use gold stock pairs.

Follow the Yen

The Japanese yen has historically enjoyed an extremely high correlation with the price of gold. In fact, charts of gold priced in dollars over multiple timeframes typically look almost like the mirror opposite of the price of USD/JPY.

The main reason for this tight relationship is the perception that both gold and the yen are safe havens.

In addition, both the USD/JPY and gold price are largely a function of real interest rates and perceptions about where they are headed. Traders looking for setups in gold may want to analyze the yen to see if similar setups prevail in the currency.

The Gold/Silver Spread

One popular trading strategy employed by some longer-term traders is the gold/silver spread. Historically, these two metals have both been viewed as stores of value, although silver has developed many more commercial uses, perhaps as a function of its lower price.

Some gold and silver traders choose to track this ratio and develop pairs trading strategies based on which asset is cheaper relative to the other. However, just as with the yen or with any pairs trade, there is no guarantee that historical correlations will remain the same in the future.

Gold Stocks Pairs Trade with Gold

Another popular strategy is to trade gold as a pairs trade against gold stocks. Some traders track the historical relationship between the price of gold and the price of gold stock indices such as the Philadelphia Gold and Silver Sector Index (XAU) or the AMEX Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI).

The idea is that gold stocks – particularly those companies that don’t hedge their exposure to the metal – are a leveraged way to purchase gold and that the two asset classes should be positively correlated.

How should beginners trade gold?

As we've seen there are several ways to trade gold, and for beginners, each of these requires some homework:

Bullion

The most direct way to own gold is through the physical purchase of bars and coins. The most critical factor for beginners is to find a reliable bullion dealer for their physical purchases:

  • Reputation: There are many online resources for conducting due diligence. Make sure your bullion dealer has an unblemished track record and positive feedback from customers.
  • Client References: Ask for references from clients and speak to them about their purchasing experiences.
  • Compare Prices: A reputable dealer will charge an equitable price for coins and bars. This price will vary by item, but with a little comparison shopping, you can make sure you are paying a fair price. Bear in mind, physical gold prices can vary from futures or ETF prices.

ETFs

A critical component of ETF trades is the fees funds charges to clients. Funds incur costs such as bullion storage in the case of physical gold or trading costs in the case of ETFs that trade gold futures. These costs get passed on to ETF buyers and are part of the management fee.

Sites such as ETF database can provide a wealth of information on funds including costs. Make sure to do an apples-to-apples comparison when evaluating funds. That is, compare funds with other funds according to their methods of buying gold (ie, futures, equities, bullion, etc).

Equities

Precious metals equities are not only affected by the price of gold, but also by the vagaries of the stock market. However, gold traders can protect themselves by trading in companies with successful track records and experienced management teams. Company annual reports and analyst reports are a great place to start your trading.

CFDs

Beginners purchasing gold through CFDs should first and foremost make sure they are working with a regulated CFD broker with a good reputation. Traders should also carefully the brokers’ fees and charges so they can compare them with other providers.

Gold Trading Tips

Here are a few tips traders may want to keep in mind when trading gold. However, these tips should not be construed as trading or investment advice. The individual must determine on their own what’s right for their unique situations:

  • Purchase size: A popular reason for holding gold is the perception that it is a safe haven or insurance for your portfolio. Therefore, consider how much exposure you want to have. Many new traders get carried away and take outsized positions in the metal.
  • Physical gold: Some traders avoid physical gold because it’s easy to gain exposure through stocks or ETFs. However, if insurance against a financial debacle is your reason for holding gold, then it may make sense to have a portion of your trades in physical gold.
  • The dollar: Probably the single most important data new traders should focus on is the dollar and the factors that move the currency markets. These factors are likely to have the biggest effects on gold prices.
  • Be a Contrarian: Perhaps more than any other asset, gold prices are often subject to a herd mentality. When sentiment for gold is at its worst, it often represents a good time to buy. Similarly, when the markets become too bullish about gold, it often means it’s time to sell. There are a variety of ways of measuring sentiment including the Commitment of Traders reports published by the Commodity Futures Trading Commission (CFTC).
  • Take a long-term view: Gold is a volatile asset and can be subject to some wild price swings. At the same time, the metal has a long trading history. Traders may want to pay attention to key long-term support and resistance levels for clues about where the metal is heading next.

Frequently Asked Questions

Below we answer some common questions about gold and gold trading.

What was the highest price of gold?

The price of gold has varied widely over the course of hundreds of years. If we look only since the 1970s, gold reached its highest level in 1980 in inflation-adjusted dollars. It has also had large peaks at other times like in 2011 when it reached its highest nominal level.

What is the disadvantage of gold?

Like all commodities, gold has a number of disadvantages. One is that it pays no dividends, so all you have is its value. Some forms of it can be costly to trade or store. But the biggest disadvantage of gold is that its price is volatile and it is difficult to trade successfully.

What does “spread” mean?

The spread is the difference between the buy and sell price of a financial instrument. A lower or “tighter” spread is better for the trader, a higher or “wider” spread generally means the broker is making more on the trade. Spreads are variable. 

Is trading gold profitable?

Looking at gold prices since 1970, there were close to as many opportunities to lose money as to gain it despite the fact that the current price is much higher. Successful gold trading requires expertise, but expertise alone doesn't ensure success. And some aspects of trading gold are simply out of the trader's hands.

[[{{Country}} Welcome]]
[[{{Country}} Welcome]]