Gold has been a favoured trade good for millennia, beating that track record is hard. Technology has made it easier to trade gold; it is no longer more complicated than trading stocks. With that in mind here’s a quick overview on what gold trading is all about in the modern era.
Understand gold as a commodity and the market for it
Understanding the general idea of how to trade gold is fundamental when starting out trading in the commodities markets. What is the average price for the past year? What are considered high and low prices for gold? Think of it like going to the shops. If you don’t know what is regarded as a reasonable price, you’ll likely overpay. If you plan to resell the item, then you can only make money if you buy low and sell high.
The entire profit margin on gold is secured when you sell, because gold, unlike stocks, will not pay a dividend. You only make money when you sell the commodity at a price that clears a profit after the fees you’re charged for buying and selling it. The value of gold is in part because it is universally recognised and accepted. It is often bought up by those who are afraid their currency is going to become worthless.
You can walk across a border with gold jewellery and gold coins and sell them for local currency, though capital controls prevent you from transferring money from your bank to that in another country. Gold can also be used as a hedge against inflation. Moving cash into gold puts the money in something that has long held its value. Gold’s value tends to soar with inflation because the value of the commodity itself goes up with inflation, but it is also bought during these financial panics.
You must be careful not to buy gold during these heated markets — that’s the best time to sell. Otherwise, you’ll buy high. Don’t buy gold when there is a rush on it, or else you risk buying at the peak and will never make your money back. Know that you can invest in gold in a variety of ways. Buying and selling gold as a commodity or owning it outright is one approach. Buying and trading gold ETFs that own shares of in mining companies, options on gold, and trade in other precious metals could yield dividends or simply diversify your holdings.
How you can trade gold
The most straightforward approach is buying the gold items, storing it, and then selling it at a later date. This is a risky approach since you lose everything if it is stolen. You can buy gold certificates from legitimate companies. These certificates are backed by gold the company has in its possession. This saves you from the hassle of having gold sent to you and need to protect it. You can buy and sell gold as a commodity, whether you buy gold futures or options. This method is a form of commodities trading, except it is with gold instead of corn or oil. In theory, you could day-trade in gold.
How to trade gold as a commodity
The standard method of trading in commodities is via a commodities futures contract. Futures give you direct exposure to price fluctuations in the commodity and the opportunity to earn money from price fluctuations. You can buy and sell gold futures or options on gold futures through brokerages that let you make these trades. You may have to open a special account to buy and sell gold futures and options. Understand that the high price of gold makes these contracts expensive, and it is dangerous to trade on margin.
Subscribe for entrepreneurial & small business advice
Subscribe to our newsletter for advice and insights on starting, managing and growing a small business in the UK.
Understand the reasons people buy and sell gold so that you don’t end up losing money on this classic asset. Learn the options you have for buying, selling and investing in gold so that you can find the one that is right for you and set up a trading account that allows you to do this.