A traditional financial safe-haven, gold is sought the world over by individuals, governments, central banks and hedge funds. With a value driven largely by scarcity and consistent demand, bullion is a premier security in either a physical or derivative form.
Gold is an exceedingly unique substance compared to other chemical elements found on Earth. It is scientifically classified as a transition metal, has an atomic number of 79 and is symbolised on the Periodic Table by the letters Au.
Bullion features several distinct physical qualities that set it apart from other metals:
Given these physical attributes, the yellow metal has an advanced utility, specifically in medicine, art, jewelry and electronics. Accordingly, the consumer demand for gold gives it an inherent value, one that plays many roles in the world of finance. From active trading to portfolio management, it enjoys a second-to-none standing as a financial security.
If you are looking for a reason to trade gold, perhaps this old adage will help: "gold has never been worthless!" The saying is true and it reinforces the historical perceptions surrounding bullion. It has served as specie, a peg for fiat currencies and stockpiled as a reserve asset―all because it has been coveted by humans since the dawn of civilisation.
In reality, there are a multitude of reasons to trade gold. No matter what an individual's market-related objectives are, bullion may be used to satisfy them. Below are two key reasons why gold trading is an attractive pastime for legions of market participants around the globe.
When it comes to trading any asset class, market accessibility is an important consideration. Each type of security has specific barriers to entry that influence how it is bought or sold. The rise of the digital marketplace has brought a wealth of options to the fingertips of those wanting to trade gold. Below are the most popular methods:
Whether one is interested in ETFs, acquiring physical bullion, or trading the XAU/USD, all that is needed is a broker, risk capital and internet connectivity. In comparison to the past, gold's barriers to entry have been greatly reduced.
No matter where one travels, the term gold is synonymous with value. Across the globe, traders and investors alike respect it as a staple of finance. Gold's historical standing, not to mention its consistent consumer demand, make it one of the most liquid assets in the world.
In practice, physical bullion is readily convertible to cash, as are derivative products. On the over-the-counter (OTC) forex, the XAU/USD is one of the most popular spot pairs, although actual turnover data is elusive. However, clearing statistics from London Precious Metals Clearing Limited (LPMCL) estimate between 18 and 20 million ounces of bullion per month were traded by its five members for the first half of 2019. (Retrieved 8 July 2019 - Link) This is a staggering figure and suggests that there is a robust institutional demand for the yellow metal.
Futures and options gold trading data is more standardised. As an example, CME gold futures regularly top 200,000 traded contracts per session, (Retrieved 10 July 2019 - Link) representing a value of more than US$28.9 billion. While institutional capital is sure to be playing a large role in the trade of CME gold futures, the strong volumes indicate that retail traders are also present in large numbers.
The dawn of the digital marketplace removed the challenge of gaining access to the gold market. Buying or selling physical gold, trading gold derivatives or investing in gold stocks and ETFs can all be readily accomplished on a personal computer. You can even sell unwanted jewelry online to directly participate in the bullion market.
Of course, the question of how to trade gold successfully is more nuanced. There are literally thousands of ways to accomplish this task and choosing the correct one can be daunting. Nonetheless, successful gold trading becomes much more probable through education, game planning and selecting the correct product.
The global bullion markets are constantly evolving with varying degrees of complexity. For anyone interested in entering these venues, it's essential to have a basic education in the underpinnings of gold value. The following are a few fundamentals that are best considered before jumping into the gold markets:
Both economic expansion or contraction can be primary drivers of participation to the bullion markets. In times of expansion, investment levels typically decrease as investors adopt a risk-on attitude, preferring securities with greater returns, such as equities. During periods of contraction, gold becomes a sought-after commodity. For instance, during the global financial crisis of 2008-12, bullion doubled in price from US$869.75 per ounce (2008) to US$1664.00 (2012).
When examining gold securities, it is important to remember whom the other participants in the market are. Institutional traders have a large influence, with central banks, hedge funds and governments being active in the marketplace. In the event institutional capital publicly takes a position, swift moves in pricing are possible.
The primary reason why gold is valuable is its inherent scarcity. It exists in the Earth's crust at a density of 5 parts per billion, (Retrieved 10 July 2019 - Link) ensuring that large concentrated quantities are rarely found. In turn, supplies grow at a relatively constant annual pace, making value largely a product of prevailing demand.
Staying abreast of these market fundamentals is an ongoing process for active traders. Changes in any of these items can greatly influence the global gold dynamic, in either a bullish or bearish fashion.
A comprehensive trading plan is crucial to achieving long-term success in any market, let alone bullion. From traditional "buy-and-hold" investment strategies to high-frequency approaches aimed at CFD products, the trading plan is a vital part of any venture into the gold markets.
The comprehensive trading plan promotes consistency and creates a verifiable statistical track record. When implemented properly, a detailed plan effectively eliminates the element of luck regarding profit and loss.
The beauty of gold as a mode of trade is its flexibility and diversity of offerings. No matter the resources, goals and methodology, a suitable product is available. For instance, if you are interested in holding gold as a long-term hedge against inflation, purchasing physical bullion is one way to go. If generating a regular income is the aim, then day trading the XAU/USD or the GOLD CFDs are possible ways of satisfying this objective.
Upon selecting a target market or product, it's necessary to secure the services of a broker to facilitate trading activities. This requires due diligence. A broker must be reputable, competent and in good legal standing; if not, you need to find a suitable alternative.
The global gold trading price is sensitive to a variety of factors. Issues such as geopolitical tensions, fluctuations in currency values or macroeconomic uncertainty are all capable of enhancing the pricing volatility of bullion. Due to the high degree of public interest, any fundamentals that skew perception toward economic or political stability are very likely to influence pricing.
The following are several market drivers that are capable of sending gold prices directional:
By far, panic and euphoria are the premier catalysts behind moves in gold pricing. In the event uncertainty is interjected into the marketplace, prices typically rise due to bullion's standing as a safe-haven asset. Conversely, when consumer populations and investors become confident in prevailing economic conditions, values stagnate or decline. For either scenario, perception is very much reality and prices frequently follow suit.
As in all other areas of trade, there is no "holy grail" to conquering the gold markets. True arbitrage opportunities are rare and fleeting, leaving performance in the hands of the individual. Successful gold trading is typically rooted in discipline, consistency and stick-to-itiveness. Without these, a foray into the bullion markets is very likely short-lived.
There are certain practices that reduce pitfalls and promote competent trade. Here are a few tips for gold trading that can enhance long-run performance:
Apply Leverage Thoughtfully: The number one enemy of inexperienced or aggressive traders is becoming financially overextended. If trading gold futures, the XAU/USD or related CFDs, applying leverage consistently and with care is essential to achieving longevity in the marketplace. Please keep in mind that leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.
Stay Current: The bullion market is a dynamic atmosphere. It is always a good idea to stay abreast of the day's geopolitical, monetary policy, economic and industry-specific issues.
Avoid Panic Trading: Led by gold, commodities markets show a consistent sensitivity to panic trading. One historical example was the Black Friday gold crash of 24 September 1869, where values plummeted more than 16% in minutes. While the volatility of panic trading is attractive to those seeking large profits, the chance of buying tops and selling bottoms increases significantly.
Adhere To A Plan: The number-one tip anyone can give on gold trading is to build a plan and stick to it. Even if a plan is not as strong as it could be, the structure eliminates haphazard risk taking, negative impacts of emotion and inconsistent trade.
Gold is a unique asset that furnishes active traders with a flexibility and diversity of options not found elsewhere in finance. If approached from an educated perspective within the context of a comprehensive plan, gold trading can be valuable in the pursuit of nearly any financial objective.
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