Gold Trade Guide: The Information You Need To Trade Gold In 2020


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Long History of Gold Trading

Gold is one of the most traded commodities in the world.

Gold is thought to be the first metal used by humans — we were already mining it over 3,000 years ago. And by 2,500 years ago, we were using it for currency.

Through most of that time, gold (and other commodities) were used as a basis for most currencies. This changed around World War I and through the later Great Depression as countries moved from such commodity currencies to fiat currencies.

Despite this, gold is still used as a store of value. It is traded more widely than ever in many different forms as we discuss below.

In a hurry? If you are looking to get started trading gold ASAP, here are our top broker suggestions to consider:

  1. Plus500: Trade Gold CFDs from over 50 countries (not available in the USA).
  2. BullionVault: Purchase Gold and Silver bullion at market prices with low storage costs at your choice of locations around the world.
  3. Forex.com: Trade silver and gold in addition to forex, CFDs, and other derivatives.

Reasons People Trade Gold

Traders purchase gold for a variety of reasons, but the following are the most common ones:

  1. Hedge against inflation
  2. Hedge against global instability
  3. Speculate on-demand growth
  4. Portfolio diversification.

Hedge Against Inflation

Gold can be a viable way to hedge against weakness in various economies — especially the United States' because of its global reach. For example, during the high inflation of the 1970s, the price of gold compensated for it.

By definition, fiat currencies lose their purchasing power during periods of inflation. All else equal, gold maintains its value. However, gold can and has lost value relative to fiat currencies.

Hedge Against Global Instability

Gold generally performs well during global crises. Wars, terrorist attacks, and pandemics, for example, often produce a flight to safety. Gold can benefit at the expense of other assets during turbulent times.

Speculate on Rising Gold Prices

Traders optimistic about the economic prospects of developing nations such as China and India may see gold trading as a way to profit from this view. Historically, gold has played an important role in these countries, and more wealth could translate into more demand for gold.

Diversify Trading Portfolio

Many traders view gold as a way to balance their portfolios. Gold historically has a lower correlation to many asset classes, which makes it an attractive instrument to diversify.

How Do Gold Trades Work? 

Think of trading gold as a four-tiered pyramid, with the safest tier as your foundation (at the bottom) and then the risk (and reward potential) rises as you climb upward on the pyramid.

  1. Insurance: gold bullion in your possession.
  2. Savings: gold bullion on deposit, gold certificates, allocated gold accounts.
  3. Trading: producing gold mining company shares, gold ETFs.
  4. Speculation: gold CFDs, gold explorer shares, gold futures, gold options.
pyramid of gold investment

Why Gold Prices Change

Gold has a lot of advantages as a commodity. It has low storage costs, doesn't expire, and is liquid. At the same time, the gold market is highly volatile and not always for sensible reasons.

Gold prices fluctuate with supply and demand. Supply is determined both by the amount mined (which has seen a steady rise in recent years) and the amount brought to market.

Demand can change based on economic changes and also simply the expectations of changes. For example, gold saw its price increase by a factor of almost 2.5 from late 2008 through late 2011, despite inflation staying low for that entire period.

Should I Speculate On Gold?

Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.

As with any trade or speculation, there are both risks and rewards with gold. In the case of both economic calamities and geopolitical turmoil, gold may provide portfolio protection. For this reason, traders might consider a small portion of their assets in gold.

Gold also offers traders a way to cash in on strength in emerging markets. Many emerging economies have experienced long periods of economic and political instability. Citizens in these economies may have experienced devaluations in their local currencies.

Demand for Gold

As wealth expands in these economies, so too can demand for gold. Traders who want exposure to growth in emerging economies without trading in local stock and bond markets in these countries might consider gold.

Speculating on gold, however, is not without risks. Strength in the US dollar and fiscal hawkishness from central banks may lead to significant price declines for gold. A slowdown in China and India or large sales of gold reserves by central banks could also cause the price to head lower.

Finally, traders should consider that gold is a commodity that is subject to the whims of the market. If traders sentiment toward gold sours, the price will head lower.

Experts Opinion on Gold

Experts have divided opinions on gold.

“Don't Trade Gold”

Legendary money-maker Warren Buffett holds a longstanding negative opinion of gold. Buffett argues that gold doesn’t have earnings or pay dividends and is therefore inferior to stocks.

Warren Buffett on Gold

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Warren Buffett — on why he doesn't speculate on gold

Buffett has a simple tenet when it comes to picking winning securities. “All there is to investing,” he says, “is picking good stocks at good times and staying with them as long as they remain good companies.” Sticking with that philosophy, Buffett's results speak for themselves. A $10,000 trade in Berkshire Hathaway in 1965 would be worth nearly $50 million today.

Fundamental to Buffett's disdain for gold is that it is not very useful. He has traded silver heavily because it has wide-ranging industrial uses.

Why Do Some People Recommend Gold?

Still, gold has most of the value components Buffett likes to see in each of his portfolio holdings:

  1. Exposure to a high-quality, growth-oriented trade
  2. Protection against economic volatility
  3. Leverage in gaining quick cash liquidity.

The famed hedge fund manager,Jim Rogers, has long argued that every trader should hold physical gold coins in their portfolio as a hedge against the collapse of other assets.

Superstar hedge fund manager, George Soros, has often held positions in gold mining stocks. Stanley Druckenmiller is another trader who has been bullish on gold.

How to Trade Gold

Gold speculators have several ways to trade the commodity:

Gold Trading & Investing Methods Compared

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

*Storage costs are passed on to traders in the form of management fees.

**Some metals ETFs offer exposure to 2x or 3x the movement in gold prices.

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

Gold CFDs

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.

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.

However, US traders in 40+ states & territories are welcome at eToro, who hold a US license for cryptocurrency trading, including Bitcoin, Ethereum & many more.

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 regulated 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.

BrokerOur RatingThe GoodThe BadSign Up
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Tight spreads on gold, easy to use platform.No phone support, only email and live chat.Start Trading Now
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www.eToro.com
Easily copy leading traders.$25 withdrawal fee is quite high compared to other brokers.Start Trading Now
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www.markets.com
Great technical analysis features.Wider spreads on gold compared with other brokers.Start Trading Now
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Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 62%-83.29% of retail trader 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.

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. 

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.

How Can I Trade Gold Futures?

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

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.

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


Top 5 Gold Stocks by Market Capitalization

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.

Here are a few leading gold explorer and mining stocks:
 Current PriceOverviewListingsFoundedNumber of EmployeesInteresting Fact
Barrick Gold
Largest gold mining company in the World, headquartered in Toronto.Toronto (TSX)
New York (NYSE)
198311,000Originally founded as an oil and gas company.
Newmont Mining
US gold mining company based in Colorado.New York (NYSE)191634,000Newmont is the only gold company in the Standard & Poor's 500 Index
Polyus Gold
Russian gold mining company headquartered in Moscow.London (LSE)
Moscow (MCX)
20064000The largest gold miner in Russia.
AngloGold Ashanti
Johannesburg based global miner and explorer.Johannesburg (JSE)
New York (NYSE)
Sydney (ASX)
200462,000The company has 17 mines in 9 countries.
Newcrest Mining
Australia's leading gold mining company.Sydney (ASX)19661,500Originally a subsidiary of the Newmont Mining Company.

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).

Additionally, there is a long-standing correlation between gold and the Australian dollar because Australia is one of the biggest gold mining countries in the world. As a result, trades on AUS/USD are related to Forex gold trades.

How do you trade gold?

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 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 (i.e., 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 broker with a good reputation. Traders should also carefully the brokers’ fees and charges so they can compare them with other providers.

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.

However, US traders in 40+ states & territories are welcome at eToro, who hold a US license for cryptocurrency trading, including Bitcoin, Ethereum & many more.

Gold Trading Basics

Here are a few tips traders may want to keep in mind when trading gold. However, these tips should not be construed as 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 as 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.

Ready to Start Trading Gold?

Plus500 logo

One of the leading brokers for trading precious metals, like gold, is Plus 500. Here's why:

  • No commission on trades (other charges may apply)
  • Free demo account
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  • Trade gold, silver and hundreds of other markets
  • Your funds are safe – publicly listed company regulated by the UK's Financial Conduct Authority and Cyprus' Securities and Exchange Commission

Start Trading at Plus500.com

Risk Warning: 80.5% of retail trader accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

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 — much less thousands. If we look only since the 1970s, gold reached its highest level in 1980. However, it also had a big peak in late 2011 and is right now (April 2020) experiencing another peak.

What is the disadvantage of gold?

Like all commodities, gold has a number of advantages. 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.

Is trading gold profitable?

Looking at gold prices since 1970, there were roughly as many opportunities to lose money as to gain it. Successful gold trading requires expertise, but expertise doesn't ensure success.

Credits: Original article written by Lawrence Pines with contributions from Commodity.com team. Major updates and additions in May 2020 by Frank Moraes.