An Introduction to Trading Gold

Gold has been greatly valued by humans due to it’s aesthetic qualities and it’s general malleability. Gold has been at the center of human commerce since the beginning of recorded history and their is bountiful evidence to suggest that Gold was used as currency in ancient Middle Eastern Societies over 2,500 years ago. This makes Gold the oldest form of currency that is still in use today. Thus Gold has a long historical track record of being a store of value, with its value having endured through periods of war, famine and other great historical events. This is why Gold is often seen as the ultimate safe haven asset. In addition, Gold also has a number of important industrial applications.

Since the financial crisis of 2008, the interest in trading Gold has risen significantly with Gold prices skyrocketing as investors and individuals look for a safe haven. With Gold prices hitting an all time high of above $1900 in late 2011. This short introductory post will discuss some of the basics of Gold trading and the factors that affect Gold prices. 

Physical gold is generally held to be valuable due to the fact that it has many of the key qualities one would want from a currency. Gold is scarce, durable, portable, uniform and widely accepted. This wide acceptance is part due to the fact that Gold has a long history of being widely accepted. The majority of people who trade Gold never take delivery of their Gold bullion but rather focus on the current spot gold price, which is based on the price of the nearest futures contract on the New York COMEX (Commodity Exchange). This means the most common way to trade Gold is either through futures contracts themselves or through derivatives based on the price of future contracts.  

In Europe, the most popular way to trade Gold is through a type of derivative known as CFD or Contract for difference. CFD’s are a leveraged instrument meaning that it is possible to trade several thousand euros worth of Gold with a much smaller initial margin deposit. This leverage works in your favor when things go your way multiplying your profits, while working against you when things don’t go your way multiplying your loses. This makes risk management and stop losses very important.  

Gold is one of the most difficult assets to value, this is due to the fact that in someways Gold is similar to a currency and in other regards it much closer to commodities such as Oil or Corn. Unlike normal currencies and stores of value, Gold is not supported by the strength of an underlying economy. Gold is also unlike Oil or Natural Gas, as it fluctuates independently of industrial supply and demand.   

A very reliable determinant of what will happen with Gold prices is the level of real interest rates. The real interest rate is the rate of interest minus inflation. When real interest rates are low or negative investments such as Cash savings or Bonds tend to have a low or negative real rate of return. This in turns pushes investors to seek alternative ways protect their wealth with Gold being seen as a good store of value. On the other hand when real interest rates are strong investors tend to move their money out of Gold into other assets in order to take advantage of the strong real interest rate.  

Short term traders have often found that technical trading strategies can be very effective when it comes trading Gold. A number of different strategies can be easily adapted to the Gold market and many have found the durable trends which Gold tends to form to be very profitable. Those looking to trade Gold with a longer term perspective may want to monitor Gold prices against the rate of real interest rates.


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