Gold is a precious metal considered to be money for thousands of years. Over the long term, it is considered to be a storage of value and a hedge against inflation. However, many traders seek to exploit gold’s price movements in the short term. In this article, we discuss ways to trade gold and factors that determine its value.
Different ways to trade gold
There are different ways to trade gold and we’re not talking about buying coins and later trading them at a higher price. What we’ll discuss is trading gold with financial instruments.
A common way gold is traded is via futures contracts. A standard futures contract represents 100 troy ounces of gold. So, if gold trades at $1,300 an ounce, the value of that contract is $130,000. However, to enter it, you only need to deposit a margin amount, which is only several percent of the contract’s value.
Another way to trade gold is via spot transactions. This means buying gold at market price. Many online brokers offer access to gold trading. Usually, these aren’t standard stock brokerage houses, but rather firms that started with currency trading and then expanded their offer to commodity trading including gold, silver, oil, and so on. These accounts actually don’t require large initial deposits like the futures trading accounts, and thus became more popular.
In addition to futures and spot trading, there’s another way to speculate on gold’s price. Many investors and traders are already familiar with Exchange-Traded Funds (ETFs). There are Gold ETFs as well. The traders like to focus on leveraged ETFs. For example, NUGT is leveraged 3 times. This ETF bets on gold’s rise. On the other side is DGLD, which bets on gold’s decline and is leveraged 3 times as well.
Some traders buy and sell gold miners’ stocks. However, their price fluctuations will not match exactly changes in gold’s price. There’s correlation, but it’s not very high.
What affects gold’s price
There are various things that affect gold’s price. One is related to the law of supply and demand. If supply is higher than demand, gold is likely to fall. If demand is higher, then it will rise.
Another major factor influencing the yellow metal’s price is the U.S. Dollar. Since gold is priced in dollars, if dollar gets stronger, gold declines- and vise versa. It happens so that the buyers using different currencies still get to pay the same price for gold in their own money. The American dollar’s value also affects prices of other commodities, including oil and silver.
Interest rates can affect price of gold as well. If interest rates rise, investors are better off earning interest on deposits and bonds than holding gold. The opposite applies when interest rates fall.
Investor’s sentiments play a role, too. If there’s uncertainty in the world, gold is considered to be a safe haven, so it’s value might rise, but it’s also offset by dollar’s rise as this currency is also considered a safe haven.
Many traders look at fundamentals such as those mentioned above. But, short-term traders watch charts very closely to spot trends. If you’re looking to trade, we advise you to learn as much about technical analysis as possible. This type of analysis looks at charts, moving averages, and various oscillators (such as Relative Strength Index) to spot trends and better understand price behavior.