Many retail traders have only just come to your life the potentials in gold trading after seeing the yellow metal gain nearly 60% this year, and surging to new highs in the process. The essence of this article is to showcase gold trading basics and present a guide for beginner traders to follow.
Gold is listed as a tradable asset on several forex trading platforms, usually as a pairing with the US dollar. Some platforms also pair gold with other currencies such as the British pound and the Euro, but the common experience with the US dollar. This pairing is written as XAUUSD.
Unlike currency trading, the trading of gold has its own unique methodology based on the unique characteristics of the yellow metal itself. What is written below is a description of how these characteristics affect the training of gold, and how beginner traders should approach the trading of gold.
What Makes Gold Suitable for Trading?
Any asset that is traded in the market must have some characteristics that make it suitable for such activity. So what makes gold suitable for trading?
- The value of gold responds to market forces, that is, the price of gold is subject to the forces of demand and supply. If the price of gold were to remain stable irrespective of what the demand or supply of the metal is, then there will be no way to profit from it.
- It must be liquid, that is, it must be easy to find buyers and sellers in sufficient volumes.
- It must contain economic value and have future benefits.
- Such an asset must have sufficient price differential over time, and must have enough volatility to create such a price differential within the shortest possible time.
Gold fulfills all these conditions. It has sufficient volatility to create the price differential that can be traded for profit or loss. It is very liquid and can easily be bought or sold in the financial markets. Gold also has enormous economic value and as an asset that has been used as a store of value over several centuries, it has tremendous future benefits. The price of gold is also subject to the forces of demand and supply.
Gold Trading in the Financial Markets
Gold can be traded in several forms. It can be traded on a spot basis, and it can also be traded as futures or options asset. In the financial markets, especially the retail trading end of the market, gold is trading as a CFD contract.
A CFD contract allows the trader to trade contracts on an asset without owning the underlying asset itself. This allows retail traders a better and cheaper way of trading gold.
Gold trading on the commodity exchanges requires exchange of the underlying assets between buyer and seller, making it very expensive. To simplify this process, the CFD contract allows you to trade the asset as if you own it, simply by trading on the basis of a price differential. The profit or loss sustained is calculated as a function of how many points the asset has moved, and the number of contracts or units of the asset that have been purchased or sold.
Characteristics of Gold CFD Trading
Here are the characteristics of gold trading for beginner traders.
- Gold trading is a highly leveraged activity. The capital outlay for trading gold is large, and many retail traders cannot afford the costs. Therefore, the trading of gold is leveraged, allowing the retail trader the opportunity to hold large positions with small capital, beyond what was ordinarily possible that size of capital. This means that you can start trading gold with as little as $100 in your trading account.
Best Brokers for Gold Trading With low minimum deposits
| Broker | Info | Bonus | Open Account |
|---|---|---|---|
 | Min Deposit: $5 Spread: From 0.2 Pips Leverage: 1000:1 Regulation: Mwali International Services Authority | 50% Deposit Bonus, Copy trading, Trade&Win. | Visit Broker |
 | Min Deposit: $1 Spread: From 0 Pips Leverage: 2000:1 Regulation: FCA UK, CySEC, FSP, BaFin, CRFIN | 35% of the account Deposit | Visit Broker |
 | Min Deposit: $1 Spread: From 0 Pips Leverage: 3000:1 Regulation: CySEC, ASIC, IFSC | $100 No-Deposit Bonus, 100% Deposit Bonus | Visit Broker |
 | Min Deposit: $5 Spread: From 0 Pips Leverage: 888:1 “*This leverage does not apply to all the entities of XM group.” Regulation: ASIC, CySEC, IFSC Belize | “50% +20% deposit bonus up to $5,000, Loyalty Program Bonus “*Clients registered under the EU regulated entity of the Group are not eligible for the bonus and the Loyalty Program” | Visit Broker |
 | Min Deposit: $0 Spread: Starting 0 Pips Leverage: 500:1 Regulation: ASIC, FCA, DFSA, The Financial Commission | Visit Broker | |
 | Min Deposit: $100 Spread: Starting 0 Pips Leverage: 500:1 Regulation: ASIC, CySEC, FSCA, FSA, FSC | Visit Broker | |
 | Min Deposit: $300 Spread: floating, from 0 pips Leverage: 500:1 Regulation: FCA UK reference number 579202 | Visit Broker | |
 | Min Deposit: $5 Spread: Starting 0.1 pips Leverage: up to 1000:1 Regulation: MFSA, Labuan FSA, BVI FSC, VFSC | Visit Broker | |
 | Min Deposit: $200 Spread: Starting 0 Pips Leverage: 500:1 Regulation: ASIC Australia, FCA UK | Visit Broker | |
  | Min Deposit: $100 Spread: Starting 0 Pips Leverage: up to 400:1 Regulation: FCA UK, NFA, CFTC, ASIC, IIROC, FSA, CIMA | Visit Broker |
- Gold is traded in lots. Despite the fact that gold is priced per troy ounce, it is the responsibility of your broker to determine how these troy ounces are priced into lots. Many retail brokers allow their traders to trade as low as 0.01 lots.
- Gold is offered mostly as a pairing with the US Dollar. This means there is an inverse relationship between gold and the US Dollar. Whatever makes gold prices rise will make the US dollar fall, and vice versa. Keep this in mind as it will help you know whether to buy or sell gold when certain news hit the markets.
The Act of Gold Trading
Trading gold as a CFD involves spot gold trading. In CFD trading, gold is not exchanged between the dealer/broker and the trader and vice versa. The trader buys or sells a contract, depending on whether the trader feels the price of gold will rise or fall.
Gold can be traded using fundamental analysis and technical analysis.
The main fundamental driver of gold prices is economic uncertainty. This produces instability in the conventional financial markets such as the stock markets or risky commodity markets. Over time, there have been many events that have produced economic instability. In 2019, it was the US-China trade tensions. In 2020, it is the coronavirus/COVID-19 pandemic that has roiled global markets.
During these times, the focus of investors is to preserve capital and not to make money. This is known as the risk-off sentiment. During these times, investment money “flies to safety” and looks for “safe-haven assets”. Gold is classified as a safe-haven asset. Such a flight to safe-haven assets generates heavy demand for such assets, leading to an increase in the price of gold. This is why gold prices have gone up so much in 2020.
The last time gold prices rose this way was between 2009 and 2012, when the world was combating the effects of the global financial crisis. The flight to safety then took gold price from below $750 an ounce to $1911 an ounce.
Gold Price Progression: 2009 – 2020
Quantitative easing raised stock markets and reduced demand for gold, leading to the price drop of 2013 to 2019. COVID-19 collapsed markets and brought back demand, leading to a rise in prices. You can use the fundamentals to determine overall gold direction.
You can also trade gold using candlesticks, price action and chart patterns. These form the basis of technical analysis. These will help you determine exact entry and exit points.
Procedures for Trading Gold
Step 1: Open a forex trading account with a broker that offers XAUUSD (gold) under the spot metals asset index. Fill the account opening form online and submit a utility bill/bank account statement AND a proof of identity (such as drivers’ license and international passport).
Once the account is verified, fund it and start trading using a tested gold trading strategy that works.
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