Similar to currency trading, gold trading is the exercise of speculating on the fluctuation of the price of gold on the market to make a profit. Although not technically a currency, gold was introduced as a tradeable asset around the same time that other foreign currencies were.
In 1972, the Chicago Mercantile Exchange launched futures trading for seven currencies. Two years later, gold was traded for the first time on the COMEX exchange in New York.
This expanded in the 1980s and towards the end of the decade we started seeing the beginning of online trading.
One of the ways to trade gold is through the use of futures contracts. As its name would suggest, futures contracts are agreements to buy or sell gold for a set price on a future date.
They are mainly traded on the Shanghai Gold Exchange, the US Futures Market COMEX and the OTC London Market. These markets are an intermediary that deal in futures rather than physical gold, however there are other futures contracts that are used to take possession of the physical commodity.
This is not the only way to trade gold, many traders prefer to trade CFDs or spread bet on the derivative gold product. The latter being a tax-efficient way of speculating on the price movement of thousands of global financial instruments, especially precious metals.
Why is Gold trading so popular?
There are many reasons for the popularity of trading gold. One such reason is the ability to preserve your wealth in gold and it has long been referred to as a safe haven.
It has proven to be incredibly durable as an asset as one of the most scarce materials used by humans for centuries. That continuing durability means that owning gold has been one of the best forms of wealth preservation in the world.
It is a hedge asset; an investment that protects your finances from a risky situation such as inflation. For example, if inflation rises and lowers the value of a particular currency, the cost of an ounce of gold in that currency will rise.
It’s relative detachment from the value of currency make it a natural hedge for forex traders. Another reason it is so popular is due to the diversification of portfolios that investing in gold brings. Having a diverse investment portfolio aidesthe reduction of risk and volatility for traders and investors.
WHAT MUST PEOPLE CONSIDER BEFORE TRADING GOLD?
One of the most important things to consider if you are trading gold is the exchange rate risk.
The value of gold and other precious metals is expressed and traded in USD. You should be wary of this when purchasing in GBP or EUR as the value of your investment could be affected by exchange rates e.g a falling pound against the dollar will have a negative effect on your investment.
Make sure to make note of exchange rates before you make your tradeand also look at future projections.
It is also important to note that gold is not a passive income asset in that buying and holding it is unlikely to build wealth. Gold does not earn compounded interest like stocks can and you are better off investing somewhere else if that is your goal.The only way you can make a return on gold is by selling when the value increases.
You must also not rely on the past performance of financial markets as an indicator for the future. Whilst an asset that has shown historically strong gains may be preferred to the opposite, financial markets can be volatile and you should make sure to do as much research as possible before investing.
As previously discussed, currency valuation has a direct effect on the value of gold. Many experts argue that the price of gold only rises when the dollar drops and inflation is high.
Recently, the dollar has fallen after hitting a 20-year high in May which saw gold fall to a three-month low. This means that prices rallied at the start of June, before steadying at around $1800 an ounce.
What is next in the quest for gold
The financial uncertainty and current high inflation rates mean that we could see gold hit new highs in 2022.
You must always remember that investing in anything, gold or otherwise, does not come without risks. Never invest more than you can afford to lose and make sure you educate yourself on the risks before you go all in.
