Ways to invest in gold
Investors have a few options when deciding to trade gold. They can directly invest in gold by purchasing gold bullion, which is a measured quantity of gold that often is assigned a serial number. Investors could also buy into gold exchange-traded funds (ETFs). They have the option of physical gold ETFs that hold the commodity itself, or ETFs that aim to track the price of gold through derivatives. Alternatively, investors can purchase gold derivatives such as gold CFDs that track the underlying asset price without actually owning any gold. CFDs use leverage, allowing investors to gain greater exposure for their initial capital.
Gold trading: how to trade gold CFDs
A contract for difference (CFD) is a popular type of derivative that allows you to trade on margin, providing you with greater exposure to the gold market. Instead of purchasing gold itself, you buy or sell units for a given financial instrument depending on whether you think the underlying price will rise or fall. Trading gold CFDs come with many advantages such as being exempt from stamp duty and not having to deposit the full value of a trade. Before someone trades gold CFDs they must consider what factors move the price of gold. CFD trading can magnify your wins as well as your losses.
Factors that influence the gold price
Gold supply and demand
As with any asset class, supply and demand have a strong influence on the price determination. The demand for gold has been rising consistently for the last 40 years due to its financial and cultural value around the globe. Gold supply is controlled by the companies that mine it, and thus have a vested interest in not oversupplying the metal, which could lower its price. So the supply of gold is fairly consistent, and subtly changes relative to demand. The demand for gold outstrips the supply, and this shortfall is made up from the recycling industry. However, market sentiment surrounding gold as a hedge and a safe haven has had a more substantial effect on the price of gold in recent times. This makes gold unique in comparison to other commodities where supply and demand has a greater effect.
Investors turn to gold during times of vast inflationary or deflationary pressures. When currencies become unstable, and risk eroding the value of monetary savings, investors tend to put their money into gold to secure their returns.
The US dollar
The price of gold and the value of the US dollar have had somewhat of an inverse relationship ever since the price of gold was allowed to free float on financial markets. When the dollar falls, some investors who hold dollars look for an alternative store of value. However, other investors that hold alternative currencies then have greater purchasing power, which could be contributing to this inverse relationship.
Financial and political instability
Financial crises and political instability can render whole economies weak. In extreme cases, investors can even lose hope in the institutions themselves. When this happens, gold prices tend to go up due to increased demand.
Central bank policy
Interests rates are a clear signal to an economy on how severe a central bank thinks inflation is. They also affect exchange rates due to rushes of money into certain countries for those investors chasing higher rates. Due to this, central bank monetary policy and interest rate announcements play a factor in the determination of the price of gold. Low interest rates are enforced in times of high inflation, so these tend to be negatively correlated with the price of gold.
Basic gold trading strategies
Once you understand the relationship between the price of gold and how each factor affects it, you can then start to spot trends in the gold price. Here are three basic strategies to trading a commodity like gold.
Combining an understanding of the price determinants of gold, alongside following a basic strategy is a good way to start trading gold CFDs. You can trade gold CFDs with a margin of 10:1 at Capital.com today.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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Gold trading: how to trade gold CFDs