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Navigating financial markets presents various trading opportunities and choices, from stocks and bonds to forexes and cryptocurrencies. However, no single financial instrument can guarantee you profits. Anyone who says otherwise is peddling false hopes.
Despite this truth, gold continues to be a favoured avenue for all kinds of traders, as it has demonstrated remarkable resilience during periods of intense market turbulence and economic uncertainties.
Unfortunately, entering the gold trading world introduces several new challenges, with choosing a trading method being a significant consideration and a primary concern for beginners and those diversifying their portfolios.
Should you buy physical gold? Trade gold futures and options? Should you invest in gold-related stocks or exchange-traded funds (ETFs)? This article aims to provide guidance and make a case for one of these gold trading opportunities – gold CFDs.
Let’s discuss how gold contracts for difference work, their benefits, what makes them different from all the other options, and the gold trading strategies to use on your trading journey.
What Is a Gold CFD?
To understand what a gold contract for difference (CFD) is, you must first learn what CFD is and how it works. Like spread betting, a CFD is an agreement that allows you to bet on an underlying asset’s price performance.
Unlike other financial instruments like stocks and forex, a contract for difference lets you profit from upward and downward fluctuations in an asset’s price. The most essential aspect of a CFD is that you don’t need to own the derivative asset.
In other words, a gold CFD is a contract that lets you participate in the gold market without owning or physically holding the precious metal and profit by correctly predicting whether its market price rises or falls.
Some astronomers believe gold is an alien element, a by-product of neutron stars’ collisions. Still, regardless of where this precious metal came from, the allure of this yellow metal has captivated civilisations, making it a symbol of wealth and stability.
Physical Trade in Gold
Traditionally, people trade gold physically, which involves buying, storing, and selling this commodity. Although alternative avenues for gold trading exist today, such as stocks and exchange-traded funds (ETFs), many investors still engage in direct gold trades involving bullion or coinage.
The Rich and Fascinating History of Gold Trading
The world of gold trading boasts a captivating history over millennia, marked by pivotal moments and remarkable developments.
Here are some highlights that provide insights into the intriguing journey of gold as the wealth opportunity people know today:
- Ancient civilisations: Gold’s shiny, yellow appearance exudes luxury, and ancient civilisations agree.
Egyptians and Romans, in particular, left a mark with their extensive mining and gold trading efforts.
- Early monetary systems: Beyond its appeal, gold played a significant role in shaping monetary policies.
Many ancient societies used coins crafted exclusively from gold as standard mediums of exchange, facilitating international trade.
- Modern transformations: Before the outbreak of World War II, countries utilised gold to dictate the value of currencies. However, this gold standard’s collapse in 1971 marked a turning point in history.
Although gold is still a store of value and a safe haven today, the precious metal has found other applications, such as in technology, medicine, and food.
A store of value is an asset, like gold and other precious metals, that maintains its value instead of depreciating. These assets’ shelf lives are perpetual.
Trading Gold via a CFD in Taurex
As mentioned, while you can still trade physical gold, other avenues to the gold market exist. One of these alternatives is derivative trading in the form of a contract for difference.
Trading gold through CFDs offers several advantages over traditional approaches, such as not requiring you to assume ownership of the precious metal and earn profits on the movement of the price of gold.
Unfortunately, not all brokerages offer CFD trading, as its availability depends on the regulations in the country where the firm operates.
Taurex provides cutting-edge trading platforms, such as MetaTrader 4 and 5 and Copy Trading by Taurex, to cater to every possible trader’s needs and lifestyle. You can start trading over 500 CFD trading instruments, including forexes and gold, with a broker like Taurex.
Gold CFD Trading Techniques With Taurex
Despite its ability to hedge market volatility, gold isn’t an asset that guarantees success. Realising profits from gold contract trading involves utilising and sometimes combining various trading techniques.
Fortunately, Taurex provides financial services, tools, and resources to help you make the best decisions based on your goals, trading horizon, and risk tolerance.
Here are some prominent gold CFD trading techniques to consider:
- Technical analysis: By scrutinising price patterns and trends from current and historical price movements, you can uncover valuable indicators that aid in pinpointing the optimal time to enter the gold market and when to pull out to cash in your earnings.
- Fundamental analysis: Like most financial assets, gold’s price moves with supply and demand dynamics, geopolitical events, and economic conditions. Analysing these essential factors can help you make appropriate speculations on gold.
- Momentum trading: Success in gold CFD trading relies on leveraging recent price movements to guide your decisions. By detecting fluctuations in market sentiment and trends, you can direct your position for potential gains.
- Scalping: In CFD trading, you determine the size of your contracts. In other words, you can execute several trades simultaneously to take advantage of short-term price movements, such as buying several agreements.
While the gains may be modest with a scalping trading technique and have a high level of risk, especially if the market moves against your bet, the cumulative effect can yield substantial results.
- Swing trading: Say you have five gold CFDs speculating on an upward price movement. Using a swing trading strategy, you partially close your trades by cashing some of your contracts. Keep the rest open to ride prevailing trends and capture medium-term gains.
Factors Affecting Gold CFD Prices and Trading Strategies
Similar to other financial arenas like the stock market, the gold market experiences volatility. These up-and-down periods influence the price of gold and the approach to take when you start trading.
Here are some critical factors that sway the delicate balance of gold CFD prices:
When the cost of living rises, faith in currencies typically erodes, and their value decreases. Gold’s price often grows when inflation rates skyrocket, as many investors seek refuge in the precious metal, assuming its value will appreciate.
When the demand for gold increases and more individuals hold the asset, gold prices go up. Consequently, this inflation response makes buying gold CFDs more expensive.
Gold’s Global Supply and Demand
Some countries, like China, Indonesia, Australia, and the U.S., invest heavily in mining operations and are major gold producers. Unfortunately, the yellow precious metal is a finite resource that will eventually run out.
As we keep finding new applications for gold, the demand for the shiny metal will only continue to rise – so will its price.
The Global Economy
Like fiat currencies, the state of the global economy directly impacts gold’s value. Central banks typically reduce their gold holdings when an economy is strong, making gold CFD prices cheaper. Conversely, prices spike when economies are mass-buying gold assets to combat inflation.
As mentioned, major currencies like the U.S. dollar influence the price of gold. Curiously, gold prices have an inverse relationship with these currencies.
For instance, gold’s value has historically increased with a decline in forex trading, an exchange between one’s money for another.
Benefits of Trading Gold CFDs
Trading gold contracts for difference offer benefits, such as trading the physical precious metal without ownership, that set them apart from other financial instruments and make them an enticing opportunity for any trader.
Here are some of the standout upsides of gold CFD trading:
No Storage or Transportation Costs
It would be best to store physical gold securely when you buy it, whether bullion or coin. Otherwise, you risk losing it or having it stolen. However, renting a safe deposit box or buying a vault for your gold storage can lead to additional costs.
Meanwhile, trading gold CFDs eliminates the need to store your yellow metal. You don’t have to deal with the surcharges that come with doing so, as contracts for difference don’t require you to own the underlying asset.
Diversifies Investor Portfolio
As the saying goes, “Don’t put all your eggs in one basket”. Adding gold CFDs to your trading portfolio allows you to mitigate potential losses by spreading the risk across several investments.
Introducing gold contracts to your investment landscape also adds a layer of resilience. The precious metal’s intrinsic value and ability to hedge against inflation can help you minimise risks and maintain a resilient position despite market turbulence.
One of the most significant advantages of trading CFDs is financial leverage, borrowed money you can use to buy more financial instruments. With leverage, even a modest account balance can yield significant returns.
For example, if a brokerage offers a 50:1 leverage, each dollar in your account allows you to control positions worth $50. That said, leverage can be a double-edged sword. While it can amplify your earnings, it can also magnify your losses.
High Liquidity and Flexibility
Physical gold doesn’t offer consistent cash flow, unlike other investments, such as stocks or forexes. In contrast, contracts for difference are highly liquid and flexible.
The CFD market can have lower initial investment requirements, so you can start trading with little money. Additionally, contracts for difference let you enter the gold market and pull out at any time, perfect if you need to use your cash elsewhere or want to invest in other financial instruments.
How to Effectively Trade Gold CFDs and Use Technical Analysis
Now that we’ve discussed what gold contracts for difference are, how they differ from physical gold trading and their benefits, let’s look at how you effectively trade them.
Here’s a step-by-step guide on how you can start trading gold through CFDs:
Open a Trading Account
As with any trading venture, your first and most crucial step is to find a brokerage and open a trading or retail investor account.
With Taurex, you can choose from several account types, from the Standard Zero account, designed to give beginner traders the necessary experience in trading, to the Pro Zero account, which includes zero commissions and competitive spreads, to Raw accounts.
You can start trading 500+ CFD instruments across forex, indices, and commodities with a trusted broker like Taurex.
Select the Underlying Gold Product You Wish to Trade
Although gold CFDs primarily offer a gateway to the gold market without acquiring the physical metal. It also opens a path to other underlying gold-related assets, such as gold mining stocks and gold-focused ETFs.
Exploring these facets of gold contracts can help you diversify your trading portfolio, develop effective strategies, and deepen your understanding of gold’s price movements.
Identify Trading Possibilities Using Your Strategy
There’s no one-size-fits-all approach to gold CFD trading. You must use the appropriate trading strategy that best suits your goals, investment timeline, and risk tolerance.
Experiment with what works best for your trading level. Fortunately, you can do so without risking losing real money with free demo accounts that let you test various trading scenarios and techniques in a simulated environment.
Open Your First Position
Now that you’ve chosen what gold product to trade and identified what approach will help you achieve your goals, it’s time to open your first position. Will you bet on a price increase or decrease?
Monitor Your Trade
Vigilance is the hallmark of trading, particularly if you’re trying to profit from short-term market fluctuations. Use fundamental and technical analyses to gauge your progress and act swiftly to maximise your earnings and reduce losses.
Close Your Position
When your market speculations agree with the current price trends, you must close your position to realise your profits. In other words, you sell your gold CFD contracts and complete the trade.
Tips for Novice Gold CFD Traders
Entering the realm of gold CFD trading as a beginner can be overwhelming. If you want to unlock the full potential of gold contracts for difference, you must consider the following:
Know When to Select Your Positions
While you can enter the gold market at any time, timing is critical. Before buying contracts, ensure a specific price, position, and trading strategy.
For instance, consider closing some of your gold contracts to capture short-term profits and adjust the remaining to meet market trends, such as changing your position if you predict a potential downward swing.
Practice With a Demo Account
As mentioned, a demo account lets you simulate trading scenarios without risking your capital. This simulated environment enables you to hone your skills, refine your trading approaches, and gain confidence in your trading knowledge and ability.
Pay Attention to the News
A significant aspect of technical and fundamental analyses is staying updated on the market. Paying attention to factors like geopolitical events, changes in monetary policies, and economic reports can help you make better trading decisions.
The Best Time to Trade Gold
With traditional financial instruments like stocks, you only have a specific timeframe within the day to execute your trades. For instance, the London Stock Exchange (LSE) operates between 8 AM and 4:30 PM.
With CFDs, most brokerages let you buy and sell gold 24/7. However, there is an optimal time to trade gold – when financial markets overlap and there’s high liquidity. This best time is from 7 AM to 5 PM GMT (Greenwich Mean Time), so set your alarm clocks!
Do Your Research
In the complex landscape of financial markets, thorough research is essential. You must understand the intricacies of gold CFD trading, its mechanisms, and its relationship with various elements to navigate the gold market successfully.
Think of Gold as a Datum
While you can use historical data to speculate future market movements, the price of gold at one point is independent of others. By reframing your perspective, you position yourself to comprehend the precious metal’s unique position in the financial ecosystem.
CFD Trading Example: Spot Gold
Let’s combine everything we’ve learned to understand how gold contracts for difference work. Before we start, here are essential points to consider:
- The spot gold price, the precious metal’s buy-and-sell value at a specific point, is $1,888.20 as of August 17, 2023.
- Gold’s tick size is 0.10, the slightest possible price movement. In other words, $1,889.20 is equivalent to 10 ticks.
Here’s how it’s computed:
$1,889.20 – $1,888.20 = 1
1 / 0.10 = 10 ticks
Say that the gold market shows an upward trend at the beginning of the peak gold trading hours. Because of a recent interest rate hike, you expect gold’s value to rise further in the next few days.
Let’s assume you open your position and buy 50 gold CFDs at 20 ticks of the spot gold price or $1,890.20. In the following days, you notice that gold’s value is now $1,910.40.
In a scenario where you sell all of your gold contracts at the hypothetical spot gold price of $1,910.40, you can expect a profit of $1,010.
$1,910.40 – $1,890.20 x 50 = $1,010
Gold Exchange Info
|Limit and Stop Levels
Note: Data were retrieved on August 18, 2023.
Trading Gold CFD Is a Breeze
Trading gold CFDs can be complex, but with Taurex, your venture into the gold market will be a breeze. We believe your success is our success, so we’re dedicated to providing you with the necessary tools, knowledge, support, and protection.
You can start trading gold contracts for difference with Taurex, a broker that adheres to the stringent standards, protects your funds using segregated tier-one bank accounts, and offers various trading tools and platforms tailored to your specific trading needs.
While this article focuses on CFDs as an avenue for trading gold, it isn’t the only one. Another gold-related trading opportunity you can consider is gold futures. Like CFDs, futures are agreements where one party buys a specific quantity of an asset at a set price on a future delivery date.
If your primary purpose for considering CFDs is to diversify your portfolio, you may want to consider exchange-traded funds. Unlike CFDs and traditional financial instruments like stocks, ETFs hold several underlying assets.
The traditional method of engaging in the gold market is buying gold mining company stocks. Unlike other gold-related products, gold stocks can be profitable despite downward movements in gold prices, making it easier to predict your position and gauge risks.
Gold CFD Trading Hours
The trading hours for gold CFDs can vary depending on the country, jurisdiction, and brokerage. Some brokers offer round-the-clock access to gold contracts for difference. However, as mentioned, there are optimal hours for engaging in the gold market.
- Why is gold a safe haven asset?
Gold is considered a safe haven asset due to its historical value and tendency to retain its worth during economic uncertainties.
- Is it worth it to trade gold?
Gold trading can offer profit opportunities, but like any investment, gold trading comes with risks. It’s essential to conduct thorough research and have a sound trading strategy if you’re considering trading this precious metal.
- Is gold the most suitable precious metal to trade?
While you can trade other precious metals, such as silver, platinum, palladium, and copper, gold is the best to trade due to its ability to ride out major recessions.
- Is gold a CFD in forex?
Forex or foreign exchange involves trading currencies against each other as exchange rate pairs. In CFD trading, you pair gold with a currency like the U.S. dollar, and that pair is called XAU/USD. In other words, you can trade gold CFDs in forex.
- How to invest in gold CFD?
Investing in gold contracts for difference is straightforward. Open a trading account with a brokerage, fund your account, and place your bets.
- What is the size of a gold CFD contract?
The standard size of a gold contract is generally 100 troy ounces. However, other contract sizes, such as 10 ounces or 1/10 of the standard size, exist depending on the brokerage.
- CFD vs. Spread Betting: What’s the Difference?
- On the Origin of Gold
- History of Gold
- 15 Uses of Gold
- Technical Analysis: What It Is and How to Use It in Investing
- Fundamental Analysis: Principles, Types, and How to Use It
- Introduction to Momentum Trading
- Trade Gold with CFDs
- What Moves Gold Prices?
- How Much Gold is Left in the World?
- What Is the Forex or FX?
- What Is Financial Leverage, and Why Is It Important?
- Disadvantages of Investing in Gold: Uncovering the Lesser-Known Risks
- Contract for Differences (CFD) Definition, Uses, and Examples
- London Stock Exchange FAQs
- Gold Price
- What is tick size?
- Gold ETFs vs. Gold Futures: What’s the Difference?
- Does It Still Pay to Invest in Gold?
- Which Precious Metal Should I Invest In?
- What Is Forex Trading? A Beginner’s Guide