Gold trading explained: How to trade gold

Gold trading is one of the world’s oldest investment vehicles. The precious metal plays an important role in the global economy. There have long been markets to trade gold in some form across cultures, serving as a proxy of wealth and prosperity.

The metal is appreciated far beyond its industrial usage, as gold deposits are rare and difficult to find. Extraction of the metal from mines is a time-consuming and expensive endeavour. This means that any disruption to mining or a substantial increase in demand can push up the price of gold.

Why do investors trade gold? There are several major reasons to invest in or trade the precious metal, including its utility as a hedge against inflation, its safe haven quality during times of political or economic instability and for portfolio diversification. Although this is not a guaranteed thing, it has long been considered a high level general strategy. 

What is gold trading?

Gold trading refers to the buying and selling of gold to attempt to profit from price movements. As gold markets are regarded as being highly volatile, traders attempt to gain returns from buying the commodity when the price is low and selling when it is high, or taking a short position on the precious metal when the prices are expected to fall.   

It requires careful consideration to trade gold, due to large price fluctuations and a wide choice of available instruments, from gold derivatives such as futures and contracts for difference (CFD), to gold mining company stocks. 

Before you begin to trade gold you should be aware that the market can be extremely volatile, which results in a high degree of risk. The chances of turning a profit when you trade gold go hand in hand with the risk of losses.

What moves gold prices?

What drives gold prices can vary at different times, depending on prevailing sentiment in the financial markets. Below are some of the main factors to watch out for.

Inflation and interest rates

High inflation has historically supported the gold spot price as the precious metal retains its value even as the purchasing power of fiat currencies declines. 

Monetary policy decisions on inflation by the world’s biggest central banks, such as the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE), are therefore one of the key considerations for what affects gold prices. Central banks often use interest rates to control the rate of inflation, which can also shape the gold prices.

US dollar value

While the US dollar is no longer tied to the gold standard, gold prices tend to move in an inverse direction to the dollar. 

Why is that? As the US dollar rises in value against other currencies, gold becomes more expensive for buyers who use non-US dollar currencies and demand falls. On the other hand, a fall in the dollar’s value makes gold cheaper for overseas buyers and demand increases.

Physical demand

Demand for gold jewellery can also affect the price of the precious metal. Gold jewellery is often bought for investment purposes and is gifted in China and India – the world’s biggest buyers – during festivals and weddings. 

In times of strong economic growth, demand for gold jewellery tends to rise. Gold demand fell during the Covid-19 pandemic as lockdowns prevented consumers from visiting physical jewellery shops. 

Gold is also used in small but crucial quantities in some electronics and industrial applications.

Investment demand

The bulk of gold demand comes from the jewellery and investment markets rather than industrial uses. 

Investment demand for gold tends to rise during times of economic or geopolitical uncertainty, as the precious metal is viewed as a safe haven asset that retains its value. Recession, stock market volatility, geopolitical tensions, natural disasters and unexpected events like the coronavirus pandemic can drive up investment demand. 

Investors can buy physical gold bars and coins or gold-linked financial instruments such as mutual or exchange-traded funds (ETFs). Investment demand can be highly volatile depending on market sentiment, but averages around 1,000 tonnes per year, according to data compiled by the World Gold Council.

Production 

Mining output can affect gold prices, if production at a mine is disrupted the available supply is reduced. Conversely, when a new mine starts to operate, supply increases. 

Around 3,500 tonnes of gold are mined annually, up from around 2,800 tonnes a decade ago, according to the World Gold Council’s data. Another 1,100 tonnes are recovered annually from recycling. 

In the last decade, China, Australia, Russia and the US were the leaders in gold production. Historically, South Africa was also a big player, yet the country has lost its position in recent years.

Gold price historical chart

Being one of the world’s oldest mediums of exchange, the gold price history has always been volatile. However, there have been periods of inactivity with relatively little movement in the gold price until the 1970s.

In 1971, after the gold standard for the US dollar was removed, a long uptrend started. Since then the gold price has fallen and risen in response to supply and demand dynamics and various macroeconomic factors. Below is the gold price history chart for the last 10 years:

Gold spot price reached its most recent record high of $2,072.50 in August 2020 as investors fled to the safe haven asset with the Covid-19 pandemic hitting the global economy and as central banks cut interest rates close to zero. 

The gold price graph shows that the precious metal approached that level again in March 2022 in response to Russia’s invasion of Ukraine, but subsequently retreated as central banks began to raise interest rates aggressively in a bid to combat high inflation.

With this history in mind, are you looking for how to invest in gold? Consider some of the most popular options.

Different ways to trade or invest in gold

There are several options you can use to trade gold depending on your trading or investing strategy and portfolio composition, from buying physical metal to using derivatives. The currency code for gold spot is XAU, which refers to the price of one troy ounce of gold and reflects the previous use of the gold standard in setting the value of various currencies.

Gold bullion

Investors who buy precious metals as a hedge against inflation and stock market crashes tend to buy them in their physical form. You can buy gold bullion as bars, ingots or coins. 

Physical metal is straightforward to buy and sell, and is considered a low-risk asset as it operates outside the banking system. However, owning physical metal requires that you arrange safe storage and pay storage costs.

Gold spot

If you opt to invest in gold through a trading account, you can trade gold spot or futures. What is the spot price of gold? Gold spot refers to the price that the precious metal can be bought and sold for immediate settlement, rather than a date in the future. 

In reality, gold is typically bought at a discount to the spot price and sold at a premium, as dealers make profits on the trade. Gold spot traders can use technical analysis to determine the entry levels to buy and sell the metal.

Gold futures

What are gold futures? If you expect the value of gold to move substantially in the future, you can trade gold futures contracts. These are contracts that trade on commodity exchanges and allow investors to speculate on the future price of gold. Under the contract, the buyer agrees to take delivery of a specified amount of gold at a certain price on a set date in the future.

Where are gold futures traded? The three main regional markets for gold futures globally are the over-the-counter (OTC) market between dealers, brokers and banks in London, the Commodity Exchange (COMEX) in the US and the Shanghai Gold Exchange in China. 

If you’re interested in how to invest in gold futures, you’d need a brokerage account with access to futures contracts. 

Gold options

An alternative to buying or selling physical gold or futures contracts directly is trading options. If you’re looking for how to trade gold options, there are two types: calls and puts. 

A call option gives the holder the right to buy gold at a set price on the date the option contract expires. A put gives the holder the option to sell gold at the specified price on the expiration date.

While futures and options are similar, an option contract does not obligate the buyer to take on the position. Options use physical gold or futures as their underlying asset.

As well as trading options with bullion or futures as the underlying asset, you can also trade options on stocks in mining companies, giving you the opportunity to buy or sell the stock at a certain price.

Gold stocks

Instead of investing in an asset linked to the gold price directly, you can invest in mining company stocks. If you’re interested in how to invest in gold stocks, you can research companies involved in the gold industry and trade their stocks through your share dealing account. 

As of 25 May 2022, the top three gold mining stocks by market capitalisation were: 

1. US-based Newmont Mining (NEM) is the only gold company included in the S&P 500 Index (US500).

2. Barrick Gold (ABX), the second-largest gold mining company in the world, is headquartered in Toronto, Canada.

3. Franco-Nevada (FNV) is the leading gold-focused royalty and streaming company. It is also headquartered in Toronto, Canada.

However, many other gold mining companies, including Agnico Eagle Mines (AEM), Wheaton Precious Metals (WPM), AngloGold Ashanti (AULGF) are available for trading. 

Gold ETFs

Exchange-traded funds (ETFs) offer a way of investing in gold that acts in the same way as stock trading through your brokerage account. 

How do gold ETFs work? ETFs trade on stock exchanges in the same way as individual company stocks. Their prices fluctuate throughout the trading day, unlike mutual funds that settle once daily and can take even longer for settlement. 

Gold ETFs such as the SPDR gold shares (GLD) are designed to track the gold price and are backed by physical gold. A unit of an ETF is equivalent to one gram of the precious metal.

However, gold ETFs are considered high-risk investments as they offer exposure to the price of gold and ownership of the trust managing the fund, rather than ownership of the physical metal.

Gold CFDs

Another form of gold trading is to purchase gold derivatives such as CFDs, which allow you to take a position on the movement of the price for the yellow metal without taking ownership. A CFD is a type of a contract between a trader and a broker in an attempt to profit from the price difference between opening and closing the trade.

CFDs are leveraged products that allow you to trade on margin and can form part of a diversified portfolio. Note that leveraged trading is risky, as leverage could increase both your profits and losses. 

What is a gold trading strategy?

Before you start investing in the yellow metal, it’s important to be clear on your strategy. There are a number of different gold trading strategies that can help you to determine when to enter and exit a trade and how to manage a position while it is open, rather than basing decisions on pure speculation. A trading strategy designed for another asset, like a stock or a currency pair, may not work in the same way for gold.

The five types of gold trading techniques

• Position trading 

A trader keeps a long trading position open to benefit from the change in the gold price over a long period of time.

• News trading

A shorter-term strategy to trade gold that refers to trading based on news, such as central bank policy statements or economic data releases.

• Trend trading 

Traders look for patterns in the movement of the gold price to identify strong trends. When the price is in an upward trend it may be expected to continue rising, while a downward trend could see the price continue to fall. 

Traders often use technical analysis to identify and confirm price trends. Technical indicators can help them to determine when an upward or downward trend changes and adjust their position accordingly. Trend following can also form a part of a gold CFD trading strategy.

• Day trading

Day traders hold a position open for a single trading session, acting on intraday gold price fluctuations. As gold is a highly liquid asset with small spreads between the bid and ask prices, it lends itself well to day trading. Day traders can use news events to focus on buying or selling gold on a specific day or time.

• Price action trading

Price action strategy is a gold trading system where traders look at the recent price movement to decide when to enter or exit a position. Unlike most technical analysis-based strategies, traders do not study charts going back over a long time period. Instead they focus on the recent price action only. 

Traders can also use differences in gold price contracts on the regional exchanges, such as the Shanghai Gold Exchange, London Metal Exchange and COMEX, to take advantage of arbitrage opportunities and buy the metal on one exchange to sell it on another.

How to trade gold CFDs?

How is gold traded using CFDs? CFDs are suitable for taking a short-term position on the gold price. If you want to start gold trading online, rather than buying physical metal, you can sign up for an account with a CFD provider. Rather than requiring a specific gold trading app, you can trade gold CFDs along with other commodities, stocks and ETFs.

To begin trading CFDs on gold, follow these steps:

1. Create a trading account

2. Choose which underlying gold product you want to trade

3. Use your strategy to identify trading opportunities

4. Open your first position

5. Monitor your trade using technical and fundamental analysis 

6. Close your position based on your trading strategy

Learn more about building your CFD gold trading strategy in our video:

Pros and cons of trading gold CFDs

Investing in gold CFDs saves you the cost of paying for physical gold storage. CFDs also allow you to trade gold in both directions. Whether you believe in a positive or negative outlook for the gold price, you can take a long or short position to try to profit from the price movement. However, CFDs are generally considered a short term investment, due to overnight fees)

The 5% margin offered by Capital.com for gold means you have to deposit only 5% of the value of the trade you want to open, with the rest covered by your CFD provider. For example, if you want to place a trade for $1,000 worth of gold CFDs and your broker requires 5% margin, you will only need $50 as the initial capital to open the trade.

However, you should be aware that trading CFDs carries risks as they are leveraged products that multiply the size of losses if the price moves against your position, as well as maximising gains if the price moves in the same direction. It is important to do your own research and understand how leverage works before you start trading.

Why trade gold CFDs with Capital.com?

Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your investment strategy. 

Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to trade gold CFDs and other top-traded commodities, even with a limited amount of funds in your account. Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified. 

Trading the difference: By trading gold CFDs, you don’t buy the underlying asset itself. You only speculate on the rise or fall of the gold price. A CFD trader can go short or long, set stop and limit losses and apply trading scenarios that align with their objectives. CFD trading is similar to traditional trading in terms of its associated strategies. However, CFD trading is short term in nature, due to overnight charges.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and make forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.

Focus on safety: Capital.com is authorised and regulated by the FCA, CySEC, ASIC and NBRB. Your client data is protected at all times and your funds are securely kept in segregated bank accounts, which you can withdraw 24/7.

Sign up at Capital.com and use our web platform or download the investment app to trade on the go. It will take you just three minutes to get started and access the world’s most traded markets.

Gold market trading hours

What are the regular gold trading hours? It depends on whether you are trading on spot, futures or options prices.

For instance, CME Globex provides electronic trading for 24 hours/6 days a week:

• Sunday to Friday, 17:00 – 16:00 (CT) with the same gold futures and options markets open time and a 60-minute daily maintenance break each day from 16:00 to 17:00 (CT)

If you choose to join Capital.com, you can follow gold prices in US dollars live and trade spot gold CFDs during the following hours:

• Monday to Thursday, 00:00 – 21:00 and 22.05 – 00.00  Friday, 00.00 – 21.00

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