How To Trade Gold
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.
Step #1 Understand The Fundamentals
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:
Economic Cycles
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).
Participants
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.
Supply/Demand
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.
Step #2 Build A Plan
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.
A robust trading plan includes parameters designed to govern market entry/exit, as well as risk and money management. In order to develop such a framework, the following situational attributes must be addressed:
Resources:
Taking an honest inventory of the amount of time and risk capital available for gold trading is the first step in building a plan. Access to adequate resources ensures that a plan is given a legitimate chance at success.
Objectives:
Clearly defining trade-related goals and objectives gives the plan a purpose. Without a purpose, it becomes difficult to measure progress and troubleshoot any issues that may undermine performance.
Methodology:
Once your available resources and objectives have been quantified, a suitable trading strategy may be adopted or created. A viable trading strategy must be tailored to inputs and goals; if not, its integrity is compromised and performance will very likely suffer.
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.
Step #3 Select A Venue
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.
