How to trade gold

May 24, 2023

Gold is one of the oldest commodities to be bought and sold, and even though modern gold trading allows for far more sophisticated methods than traditional trading which requires you to physically acquire gold jewellery, bullion or coins, the commodity remains a popular and relatively stable option to include in an investment portfolio. 

If you’ve ever wanted to master how to trade gold, or you’ve been interested in investing in this hard commodity, there are a few things you’ll need to know before you get started. By following our in-depth guide, you’ll be able to discover what gold trading and investing is, what causes its price to fluctuate and how to decide what option for gold trading will serve you best. 

Step 1: Discover what gold trading and investing are

Gold has long been a valuable and highly prized precious metal for its lustre, its unique properties, and as a form of money. Many global currencies were traditionally backed by gold — a concept known as the gold standard. In the UK, currency was originally backed by sterling silver (hence ‘Pound Sterling’) and later became backed by gold. The gold standard was abandoned in the UK in 1931, but gold still remains a valuable commodity, and it is considered a stable asset that holds its value even during periods of economic uncertainty. With the demand for gold worldwide only growing, even as gold mining decreases, an assumed increasing demand also makes investing in or trading gold an attractive proposition for investors.

In order to start trading gold, you need to have a solid understanding of the types of gold assets available to you. Some of these involve taking possession of the physical asset, while others do not. 

• Physical gold – The oldest and most traditional form of investing in gold is to literally buy a certain amount of the precious metal. Gold jewellery and gold coins do have some value, but the most significant form of investment in physical gold is with gold bullion.
  
  Because this option requires the security concerns, logistics requirements and insurance associated with holding a store of a physical asset, it is usually not undertaken by individual investors, but more commonly by banks and other financial institutions.
  
• Spot price purchasing – Spot price purchasing refers to buying or selling gold upfront, at the price the metal is worth ‘on the spot’. This price is usually calculated per troy ounce, and can allow active investors to get exposure to bullion, without taking physical ownership of it.
  
• Gold futures – Futures are contracts which determine a set price for gold and then nominate a date at which an exchange would be made in the future. Gold futures come with an obligation to make the exchange on the nominated date, and deal with speculation on the movement of the market to deliver investors a profitable return.
  
• Gold options – Unlike futures, gold options do not obligate a trader to make an exchange, but they do allow for such an exchange to take place. There are two kinds of options: calls and puts. Calls give the right of exchange to buyers, while put options allow for the seller to make an exchange if they so choose.
  
• Gold ETFs – An acronym for gold exchange traded funds, ETFs are passive investments which see a basket of shares in gold industry related companies viewed together, and this basket’s movement in the market is tracked. They’re good for giving investors a wider exposure and diversifying their portfolio.
  
• Gold stocks – Finally, gold stocks are any stocks in gold production, mining, funding and sales companies which would allow a trader to gain direct exposure to the commodity through gold investment or trading. It’s worth noting that gold stocks won’t always move in line with the price of bullion, and therefore may require a more nuanced approach to understanding their trending price. 

How to trade gold CFDs

Before we move on to what moves the price of gold, let’s also touch on what gold CFDs are, and how to trade them. A CFD is a contract for differences. Gold CFDs allow a client to trade on a percentage margin of an asset’s full notional value, rather than the entire price – a concept known as leverage. 

CFDs, unlike options and futures, don’t have an expiration or pre-determined close date, and they’re good for riding short term market movements in the pursuit of further diversifying your portfolio. They also can be traded 24 hours a day, 7 days a week, unlike gold ETFs.

Step 2: Learning what moves the price of gold

Whether it’s short term movements or a long term investment you’re interested in, to learn how to trade gold successfully, you need to have a grasp on what causes the price of gold to fluctuate in the first place. Here are the major reasons for movement in price: 

• Mining — As it’s a commodity – that is, a physical raw material – the supply of new gold into the market via mining is a key factor which will determine its price. Although gold can be recycled in a way that, for example, oil or wheat can’t be, it is still a finite resource, and mining globally has slowed over the past decade, with mining companies looking to preserve costs in the face of dwindling reserves.
  
  The search for new gold deposits continues, but for now this decline in mining suggests a rise in price as the demand for gold continues to rise and the amount of new gold deposits declines.
  
• Demand — As mentioned above, the demand side of gold’s supply and demand equation becomes more important to price as the supply side dwindles. Demand for gold has predictably increased since the 70s, quadrupling every year for the last 50 years. Today, half of that demand is for jewellery, while gold ETFs also occupy a significant portion of overall consumption, at around 29% of total demand.
  
• Global currencies — Especially the US dollar, but any currency of the G10 countries, tends to have an inverse relationship to the price of gold.
  
  If the price of gold is rallying against a major world currency like the US dollar, Japanese Yen or the Great British pound, this is traditionally seen as a good time to buy up the precious metal.
  
• Interest rates — Typically, a rise in interest rates will cause gold’s value to fall as investors turn to fixed-income assets like property. Drops in interest rates tend to have the opposite effect, pushing investors back to the safe, secure investment that gold has for so long represented.
  
• Political, economic and security issues — Gold has traditionally been viewed as a ‘safe haven’ – a reliable investment when uncertainty shakes markets, tanks currencies and threatens global security and stability. Volatility in other areas such as political instability, financial stress and major global events such as the COVID-19 pandemic all cause gold prices to spike.
  
  Conversely, periods of prosperity, growing GDP and positive financial markets tend to depress the price of gold in favour of oil and bond yields.

Step 3: Deciding how you want to trade or invest in gold

As you can probably tell from the above list of factors that move the price of gold, it can often be a tricky task to pinpoint which specific reason or combination of reasons is driving movement in the price of gold. Often, comparing the performance of gold in different markets to see a pattern of correlation can be insightful, so you may want to bear this in mind when you decide which option for investing in or trading gold is right for your portfolio. 

In general, trading gold is better for maximising exposure and taking shorter term positions, while investing in gold creates a more diverse portfolio geared toward long term gains. Gold ETFs and stocks are good for long term investment positions, while spot trading, gold futures and gold options are better suited for someone who wants to leverage their exposure, hedge their portfolio and not take ownership of any underlying assets. 

If you’re not sure which option to go with, opening up a demo account will allow you the freedom to practise gold trading, experiment with different options and learn more about the market without risk. 

Step 4: Creating your gold trading or investment account

After you’ve honed your skills with a risk-free demo account, you can get started trading in live markets by creating a live Forex account. This only takes a few minutes to set up, and is designed to be easy to use, even if you’re a first time trader. 

Step 5: Finding an opportunity

With your account, you’ll have access to trading tools, technologies and market analysis to find the right opportunity for gold trading. Make sure to take advantage of all the features that platforms like MetaTrader 4 and MetaTrader 5 offer you, so you can choose the right option based on technical indications and market trends. 

Step 6: Opening your first gold trade or investment

Your research of the market may reveal more than one potential opportunity for gold trading, but it’s also important to make sure you manage your risk and don’t over-expose your position. Implementing a tool like a stop-loss order or limit-close order can help you in this regard, providing an automatic threshold under which your trade will automatically be closed. 

Whether you choose to open trading for a spot price gold trade, a gold future, gold option or gold ETFs will depend on whether you want to go long or short on gold. As we’ve touched on, spot gold, gold futures and gold options are good for short term trading, while gold stocks and ETFs suit long term plays. Either way, you’ll need to make sure you’ve done your technical and fundamental analysis before making a move and opening a gold trade.

Step 7: Developing your strategy and closing your position

When your trade is open, VT Market’s powerful platforms make it easy to monitor your profit or loss position, and keep an eye on broader market trends and moves, so you can close your position in the strongest possible place according to your investment and trading strategy. 

Ready to start trading gold? 

If you’re feeling primed and ready to start trading gold, VT Markets is the perfect platform to help you trade gold using a method that works with your broader investment or trading strategy. From exceptional customer service to our innovative trading platform you can use easily from your own computer or mobile device, we’re here to help empower you to build a diverse portfolio and watch your profits grow. 
From learning how to trade gold and copper to providing expert market analysis and Forex signals, VT Markets makes getting started with market trading transparent, straightforward and simple. Get started by creating your gold trading account today, or get in touch for more information about using our trading tools yourself.