Why and how to trade gold

How to trade gold

Futures contracts

By investing in gold through futures contracts, you buy a future supply of a certain amount of this precious metal in its physical form. However, this does not mean that you have to install a vault for storing all those bricks. Each contract has a predetermined date when the delivery of gold in its physical form should take place. It is called the expiration date. Therefore, if you manage to "get rid" of the contract and sell it before it expires, you will not need a vault.

If you are not interested in speculating on gold prices in the short term, but would rather want to invest in gold in the long run, we would rather not recommend this method of trading.
 

Purchase of gold in physical form

Who wouldn't like to own a nugget or even a brick of gold? With it, you have your investment at hand and under control. However, it’s not that easy as it might sound. If you want to trade gold in the way where you come to the dealer, give him a certain amount of money and then take away the precious metal, you are never sure that you will not fall into the trap of fraudsters. It is often almost impossible to recognize false gold unless you are an expert.
 

Buying gold for a spot price

The second option is to buy gold at a spot price, where you buy a contract for a certain physical amount of stored gold. Like other ways of trading gold, buying gold at a spot price has its pros and cons. A partial advantage is a possibility of using financial leverage, a mechanism that allows you to trade with amounts that several times your initial position. Partly because higher profits can come with higher losses. The disadvantage is the need to pay interest for the storage of gold acquired, which will be reflected in expenses, especially if you plan to hold the investment for a long time.
 

Speculation on the price of gold with CFD contracts

A very popular method is trading through so-called contracts for difference. These are speculative papers artificially created by the broker, the price of which is usually derived from the price of futures contracts or from the spot price of gold. Thus, the trader does not directly own gold, he only speculates on its price (the instrument designed for this is called XAUUSD - it is, therefore, the relationship between the price of gold and the US dollar). The advantage is that in the case of CFD contracts, in addition to growth, it is also possible to speculate on a decrease and it is, therefore, possible to profit in both directions. This means that the trader has the opportunity to profit regardless of whether the gold is thriving, and the price is rising, or the opposite. In this case, it is crucial to correctly estimate the direction in which the price of gold will develop. Another reason why CFDs are an increasingly preferred form of gold trading is the ability to use financial leverage to trade larger amounts than your original deposit.

In this sense, differential contracts are similar to futures contracts in that they are used for speculation, but with one important difference - the differential contract cannot expire. Given that these contracts are created artificially by the broker, it is recommended to bet on a quality broker with transparent trading conditions and a good reputation among other traders.
 

Advantages of CFD contracts:

• You can trade with smaller capital (unlike the above-mentioned methods of trading, when you need capital in the order of hundreds of thousands euros, for differential contracts, thousands to tens of thousands euros will suffice).
• Leverage (determines the ratio of the amount of capital you put into a given trade to the funds provided by the broker. In Purple Trading, we offer 1:20 leverage for gold trading - meaning that you can open a trading position of $ 2,000 for $ 100. This then corresponds to both profit and potential loss. Therefore, it is necessary to use the leverage wisely).
• The opportunity to speculate on the rise and fall of the price of gold - With CFD contracts, you are not the owner of gold, which means that not only are you not worried about the fall in prices of this precious metal, but you even have the opportunity to profit from it.  

ETF

ETF portfolios are a kind of set of shares or bonds of companies in which the investor invests at once. Their composition always follows a certain concept. In the case of gold, the ETF portfolio will contain shares or bonds of companies that mine or process gold. This method of investing in gold is passive and long-term with the possibility of receiving dividends.

What affects the price of gold

1. Interest rates - If interest rates fall and having cash deposited with the bank becomes disadvantageous, investors are often looking for another opportunity to capitalize on their capital. And it is precisely the gold that can offer what they are looking for. And so they reach for it which then increases the demand and thus gold’s price. Conversely, if central banks (especially the Fed) raise rates, the price of gold falls.
2. US Dollar - As we mentioned at the beginning, the relationship between the US dollar and gold has a historical dimension. This also implies a relationship between the prices of the two entities, which could simply be described as inversely proportional. In most cases, the price of gold rises along with the falling price of the dollar. However, there are exceptions that confirm this rule, so you should consider the price of the dollar only as one of several factors to observe when trading gold.
3. Oil prices - The level of oil prices often mimics current geopolitical developments and overall market uncertainty. In times of crisis or war, we can also see an increase in the price of oil. And it is precisely the price of gold, which is also reflected in this uncertainty because investors are looking for the already mentioned "safe haven" for their capital, which they will get with gold. It can therefore be said that in most cases when oil prices rise, the price of gold also rises. Another reason may be the fact that the price of oil is tied to the dollar and if oil rises, so do inflation, which again leads investors to look back on a more appropriate way to invest. And that is exactly the investment in gold.
4. Nervousness on the stock markets - Nervousness on the stock markets can be caused by the above-mentioned wars or economic crises, as well as by periods of political transition (election of the US President, Brexit). This then manifests itself in a change in the behavior of investors who begin trading gold as a "safe haven".
5. Demand for gold - In addition to jewelry, the properties of gold are also used in the production of electronics, medicine, and aviation. However, the development of the price of gold, in addition to the demand from these sectors, also depends on official government purchases. Gold is bought/sold by central banks in order to regulate their reserves and stabilize the value of their currency. At this point, it is worth mentioning that the current volume of gold purchased in this way is currently at the highest level in the last 50 years. And where there is constant demand, a slight increase in price can also be expected.

How to choose a broker suitable for gold trading

If you are considering trading gold, you should first think through choosing a quality broker. In addition to buying gold in physical form, you will need an intermediary between you and the market for all variants of trading (CFDs, ETFs, Futures, buying at a spot price), and this role is played by the broker.
 

1. Trading conditions - in case you are going to actively trade/speculate, you will need excellent trading conditions. In particular, you should be interested in the execution speed (the response with which your trade order reaches the broker's server and from there the market. This is stated in milliseconds and the closer this metric is to 0, the better) and spread prices (the difference between the bid and ask price, again, the lower, the better). In Purple Trading, we pay attention to the maximum possible level of transparency of our services, so if you are interested, you can view statistics on the execution speed and spread prices (gold can be found as the XAUUSD symbol in the CFD column). Purple Trading falls under the Cypriot regulator CySEC, which is further controlled by the European Securities and Markets Authority ESMA. Our clients, therefore, have the highest possible level of protection in accordance with EU regulations, so they can also rely on negative balance protection.
2. Broker License - In general, brokers based in the EU are forced to show a higher degree of transparency due to regulations protecting clients. The so-called Offshore brokers, on the other hand, can offer higher leverage (up to 1: 400) and often lower service fees. However, the client/trader is not protected to the same extent as with the EU brokers. For example, negative balance protection, which prevents you from falling into the red in your trading account, is an obligation for EU brokers, while not for off-shore brokers. Purple Trading falls under the Cypriot regulator CySEC, which is further controlled by the European Securities and Markets Authority ESMA. Our clients, therefore, have the highest possible level of protection in accordance with EU regulations, so they can also rely on negative balance protection.
3. STP vs MM model - Based on how brokerage firms process their clients' trading orders, they can be classified into several categories according to so-called models. The most basic divisions are STP (Straight Through Processing) and MM (Market Maker). The STP broker acts as an intermediary between the client and the market in which his order is matched with the counterparty, thus it’s being executed. Then there is MM who settles all its clients' orders directly with itself and thus artificially creates the counterparty. This basically means that if the client doesn't make money, the MM broker makes money and vice versa. This can create space for manipulating client orders, which is also proven by several cases from the past. However, this is not the case with Purple Trading, which operates on the basis of STP. With us there is no conflict of interest, because we only thrive when our clients also thrive. This topic is quite important, but it is not very often mentioned in discussions between traders. So if you are interested, you can read more about it here.