What is Gold Trading & How to Trade Gold? / Axi (2024)

What is gold?

Gold is a precious metal prized by humans throughout history due to its lustrous appearance and scarcity. It has been used widely throughout history in jewellery and as money and has recently found applications in electronics, medicine, and even gourmet cuisine.

Used historically as currency, gold was used to establish the gold standard, in which paper money was redeemable for gold. In the past, several countries pegged their currencies to gold. While this is no longer the case, it remains a form of liquid reserve for a portion of central banks’ savings.

Although its use as a medium of exchange has been superseded by more modern methods of payment, gold remains universally recognized as a reliable store of value. It plays a vital role in the world of finance and investing, operating as a hedge against economic uncertainty and demonstrating its ability to generate substantial returns for investors.

Gold is extracted through a costly mining procedure. Newly mined gold supplements the current supply. Unlike other commodities, such as oil, which is only used once, gold cannot be destroyed, and the quantities produced remain in circulation and can, at least in theory, be recycled and reused in the future.

What is the gold market?

The gold market is a general term that refers to all the channels through which gold or its derivatives are traded globally and across all time zones.

This comprises physical markets and markets for investors and speculators such as exchange-traded funds (ETFs), futures and options markets.

Top gold exchanges

Gold is primarily traded over the counter (OTC) and on exchanges. London is the global centre for the OTC market, where market players trade directly with one another. While this market is less regulated and more flexible, the counterparty risk is potentially higher.

Three significant gold trading centres account for more than 90% of worldwide gold trading volumes and play a key role in driving price discovery. These are:

The London OTC market, which trades 400-ounce bars. It sets the London Bullion Market Association (LBMA) gold price twice a day, the global reference benchmark for gold.

The Chicago Mercantile Exchange (CME) Group operates the US futures market (COMEX derivatives exchange). While only a few contracts are physically fulfilled with the delivery of bars, the exchange is becoming increasingly important in the pricing of gold.

China is home to the Shanghai Gold Exchange (SGE), the world's largest physical spot exchange, which launched the Shanghai Gold price benchmark in 2016, as well as the bustling Shanghai Futures Market (SHFE).

Recent indicators indicate a move to the east. Dubai, India, Japan, Singapore, and Hong Kong are among the other secondary markets.

Exchanges are regulated platforms with centralised trading. They typically provide a standardised contract, which will not suit every trader as it might limit their flexibility.

Gold market participants

Due to the popularity and varied usage of gold, the gold market has a diverse range of participants with different objectives.

Jewellery manufacturers and industries that use gold, such as the electronics industry, must get their hands on the physical asset; they also enter the futures markets to hedge against unfavourable changes in market value.

Customers who wish to invest in gold and own it in the form of bars and coins can do so through a specialised market. Due to gold's quality as a store of value, this group typically prefers to hold onto their gold for the long term, despite short-term swings.

Investors of all sizes trade gold to speculate on price swings or diversify their portfolios. Banks and hedge funds, for example, trade gold as part of their risk management strategies.

Central banks use physical gold as part of their foreign exchange reserves, as a store of stability for the country’s currency, and as a hedge against geopolitical concerns.

Short-term speculators and long-term investors are more interested in gold as an investment or speculative vehicle than in physical ownership.

Short-term investors can gain exposure to price movements, which are typically accentuated by leverage, without owning the underlying commodity by employing financial derivatives, such as gold futures, options, and exchange-traded funds (ETFs).

Speculators typically:

Trade futures contracts, or CFDs.

Go both long and short.

Hold positions from seconds to months, depending on their profile (e.g., an algorithmic fund may keep the position open for seconds, while a macro hedge fund may keep the position open for months).

Longer-term investors are lured to the market as well because of gold’s long-term appreciation, which has made it the investment of choice for hedging against inflation, currency fluctuations, geopolitical conflicts, and financial market volatility.

Investors typically:

Buy actual gold bullion (bars, ingots, and coins) or invest in gold ETFs.

Hold it for a long time.

Use it as an inflation hedge and diversify their portfolio.

What might affect the price of gold

• Supply and demand: Regardless of how popular it is to buy ETFs or trade CFDs and futures, variations in the physical demand and supply of any commodity will cause fluctuations in its price. Demand for gold comes from jewellery and industrial applications, investments, and central banks, while supply comes from mining operations, central bank sales, and precious ore recycling. Even though new gold finds are becoming increasingly rare, mining still accounts for 75% of the supply, and the discovery of new deposits can drive prices lower.
• Geopolitical developments: The yellow metal is widely seen as a safe haven, and prices tend to climb during times of global concerns, such as political unrest, trade conflicts, and natural disasters, as investors seek refuge in gold.
• Economic uncertainty: When investors are concerned about rising inflation and declining interest rates, gold tends to appreciate since holding cash becomes less appealing. Other factors influencing gold prices include GDP growth, economic uncertainty, and market volatility.
• Fiscal policy: As gold is priced in US dollars, the commodity and the currency have an inverse relationship. Expectations and announcements regarding rising interest rates in the United States will strengthen the dollar while putting pressure on gold. Conversely, talk and anticipation of lower rates may cause the US Dollar to fall while gold prices rise.
• Gold benchmark: The price set by the London Bullion Market Association (LBMA) is the most widely used gold price in the world.
• Investor sentiment: In addition to the variables mentioned above, market participants' perceptions of gold as an investment can fuel speculative trading and produce short-term volatility.

What is gold trading?

Gold is one of the oldest and most trusted forms of currency in the world. Gold's intrinsic worth, or "safe haven" appeal, makes it a popular investment and an effective way to diversify a portfolio for traders.

Trading gold involves buying the metal with the expectation that price appreciation will make it profitable to sell it later. This can be accomplished by purchasing gold in physical form, such as bars, ingots, or coins, or by investing in financial instruments that monitor the price movement of gold. These financial instruments also enable traders to take short positions on gold, that is, to sell in expectation of a price decline, which will make the asset profitable for buying later.

In the current context, trading gold refers to speculating on the price of gold through buying and selling derivative financial instruments rather than acquiring the precious metal in physical form. As a result, gold traders can participate in price movements without having to handle or store the underlying assets.

There are several options for trading gold that cater to each trader’s strategy and risk profile. These include trading spot gold contracts, gold futures, gold options, ETFs, and stocks of gold mining companies.

How does gold trading work?

The gold ticker symbol is XAU. The letter "X" stands for "Index," whereas the letter "AU" stands for "Aurum," the Latin word for gold.

Using a ticker simplifies product searches on the MT4 trading platform.

The most popular currencies to trade against gold CFDs are the USD, AUD, CHF, EUR, and GBP. The symbol for a gold trade against the US dollar is ‘XAUUSD’, while the symbol for trading gold futures CFDs is ‘GOLD.fs’

Bullion spot CFDs are priced using the underlying spot market, whereas futures CFDs are priced using futures contracts.

• Gold CFDs: A CFD allows you to trade the real-time price movement of gold without purchasing physical gold. Because CFDs are leveraged products, you only need a modest investment to have full exposure to the underlying trade. It is important to note that the profit or loss is determined based on the whole size of the trade position, so profits and losses are amplified.
• Gold futures: If you anticipate that the price of gold will rise in the future, you can enter a contract with a seller and agree on a fair price to be paid today. When the actual gold is delivered at the end of the contract, you can sell it for more at a profit.

Why trade gold?

Several factors make gold an ideal asset for trading:

First, there is a wide range of trading instruments available, all of which are easily accessible through online trading platforms. Retail investors with varied levels of capital can enter this market, unlike other investments, which require large capital resources.

The global gold market is characterised by strong liquidity, allowing traders to easily enter and exit their positions.

Finally, gold is seen as a safe-haven asset, making it an appealing addition to any balanced portfolio. In times of economic instability and geopolitical turmoil, it tends to keep its value and even appreciate. Consequently, while traditional markets come under pressure, gold traders can use their trading strategies to find opportunities from price fluctuations.

How to trade gold?

As with most investments, the trading journey begins with research on the asset and chart analysis to determine volatility and trend direction.

Identify historic support and resistance levels; they are crucial indicators for probable price reversal.

Use fundamental analysis to supplement technical analysis, keeping a close eye on the factors that drive price movement. These include all current events that affect investors and surprise the markets, such as economic and political instability, the strength of the dollar, which is inversely related to gold, interest rates and inflation, and changes in gold production as well as the price of stocks in gold mining companies.

When you decide to initiate your trade, predetermine the levels at which you intend to be taking profits, and make sure you have a stop-loss in place in case the trade goes against you. By sticking to your plan, you will be able to keep emotions off the trading floor and improve your decision-making process.

Advantages of trading gold

Gold has proven to be a reliable way to preserve wealth. While the price of gold fluctuates and occasionally experiences considerable volatility, the value and purchasing power of the precious metal has steadily increased over time. This is enhanced by the consistent demand for gold, which stems from its use in the production of jewellery as well as industrial and technological applications.

Gold is universally recognised and holds its value regardless of a specific currency. It has historically served as a solid hedge against inflation and currency devaluation, both of which erode not only investor gains but also general purchasing power. When the stock market is in turmoil and cash is losing value owing to low interest rates, gold can become an appealing asset class for investors, offsetting losses in other investments.

Because gold is highly liquid, buyers can quickly locate sellers without significantly impacting the price. This is significant because it reduces transaction costs and gives traders and investors confidence that they will be able to enter and exit positions quickly. Even the physical gold market is liquid, as it is not difficult to find a buyer.

Gold is an excellent diversification tool that can help minimise overall portfolio risk. It has historically had a negative correlation with stocks and bonds, but it can outperform the stock market at select periods, such as when there is widespread risk aversion.

Trading gold is accessible to retail traders and institutional investors alike. The large range of available financial instruments, including CFDs, stocks, and ETFs, as well as the multitude of available online trading platforms, enable traders worldwide to engage in the market, regardless of an investor's portfolio size or risk profile.

Disadvantages of trading gold

Although gold prices rise in the long term, they can be highly volatile in the short run, driven by news, data releases, and economic and geopolitical events. Trading gold requires careful risk management, especially when using leverage.

Gold, unlike stocks and bonds (and even cash), does not produce a yield or dividend. Aside from the potential for capital appreciation, gold does not generate additional income for traders. As a result, investors who value regular, consistent income streams may find gold trading less enticing, particularly in periods of price consolidation. Returns might be low during "risk-on" periods when investors flock to riskier assets.

Investors who choose to retain physical gold in the form of bars or coins must provide secure storage facilities or invest in safe deposit boxes. These storage costs can cut into the overall return on investment.

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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.

Milan Cutkovic