Gold Trading Essentials

Jun 26, 2020 08:04 PM ET
Gold Trading Essentials

Introduction

Gold is one precious metal that provides exciting trading opportunities to almost all types of traders. Whether it’s for long-term investment purposes or for short-term speculation, the majority of traders in the world see gold as a safe haven instrument especially in times of financial storms. This makes it a preferable asset for diversifying portfolios.

Humankind has considered Gold to be one of the earliest materials which hold great value and has been fascinated with it throughout the ages. However, unlike other commodities such as wheat or oil, people do not consume or simply use up Gold. Instead, Gold is stored in lockers, vaults and in other storage units across the world, or in the form of jewelry or gold bars. As a result, the traditional demand and supply argument which applies to other commodities such as grains or oil, cannot be applied to gold. Investors and traders use gold as a hedge against inflation. This is because it functions as a good store of value especially against a currency on the decline.

Main Gold Producers

Throughout history, investors have considered gold as a unique value investment as its reserves worldwide are limited. Mainstream historians believe that it is the first metal that humans have used. As humans, we have been successful in mining it over 3000 years. Gold has been used as currency for 2500 years as far as history is concerned. Gold and other commodities throughout history were the basis for most currencies. This soon changed around the time of World War I and later, through the great depression when countries started to switch from commodity currencies to fiat currencies. Despite the switch, gold is the preferred storage of value for the majority of the world. People trade Gold far more than ever in many different forms around the world.

Some of the countries with the biggest deposits include China, Australia, Russia, The United States of America, Canada, Indonesia, Peru, South Africa, Mexico, Ghana, just to name a few.

The Top 5 Major Mining Companies Include:

  • Newmont Goldcorp- It is one of the largest gold mining companies with notable operations in South America, North America, Australia, Africa, and Asia as well. Newmont Gold stood at the top position in 2018.

  • Barrick Gold- This is another major gold mining company second to Newmont Goldcorp. It also merged its Nevada assets with Newmont Goldcorp.

  • AngloGold Ashanti- This is one of the top South African gold mining companies. The company has 17 gold operations in 9 distinct countries along with several exploration projects across the globe.

  • Kinross Gold- Kinross Gold makes it to the top 5 as it has successful projects in Mauritania, Russia, Brazil, Chile, USA, and Ghana.

  • Newcrest Mining- This gold mining company claims to have the largest group gold ore reserves of any company in the world. Its projects are operational in Canada, Australia, PNG, and Papua New Guinea.

Gold Against Inflation

A safe haven investment is one that is likely to increase or retain its value during tough and troubled times in the market.  Investors and traders seek these investments to reduce their exposure to losses during market turbulence. One such safe-haven investment is Gold. For years, gold was a store of value not susceptible to interest rates decided by the government. Past statistics prove that gold retains its value even during stock market turbulence.

Now that gold has been maintaining its value throughout history, it serves as a kind of security and insurance protecting the investor against adverse economic scenarios. When an adverse situation hits and stays for some time, investors like to convert their money into gold which shoots the gold prices due to increased demand. So when there is a threat of inflation the value of gold increases. This means the traders end up holding/ owning high fortune. This is a result of fiat currencies such as cash, losing their value during such times, unlike gold. Gold protects traders and investors against inflation which makes it a highly valuable and preferred investment while offering reliable returns and lower risk than the stock market.

Gold vs Silver, Bitcoin

When comparing to Silver, Gold has a lot of similarities but some pronounced differences as well, in spite of the fact that both of them are precious metals.

Here are some of the differences. 

Points of difference

Gold

Silver

  • Industry

Various studies have stated that industries have little impact on the price of gold.

Industries comprise almost 56% of the total supply. 

  • Volatility

When it comes to volatility, gold is less volatile. During bear and bull markets, the price of gold falls less and rises less respectively. 

Silver is more volatile in comparison as it falls more in bear markets and rises more in bull markets. 

  • Stockpiles

Gold stockpiles have maintained a certain level and are steadily increasing in Central bank reserves around the world.

The stockpiles of silver have been decreasing since the last multiple decades. 

Gold has some pronounced differences with Bitcoin as well. 

Points of difference

Gold

Bitcoin

  • Margin requirements

Since Gold is less volatile than Bitcoin, margin requirements are lower. 

Margin requirements are higher in the case of Bitcoin. Traders should factor this in when deciding on the amount of leverage to use.

  • Store of value

Backed up by physical assets

Not backed up by any physical assets

  • Sensitivity to news

Gold reacts to news but its price tends to move at a slower rate than bitcoin.

Bitcoin is very responsive to news requiring traders to always stay on top of the market updates at all times. 

How To Trade Gold?

There are many options a trader has to be aware of before they dive into trading with gold. These include the following: 

  • Gold ETFs: Considered as one of the best ways to invest directly in gold, Gold ETFs combine the advantages associated with physical bullions with the liquidity of a traditional security market. Gold ETFs trade much in the same fashion of stocks on a stock exchange. It functions similarly to a commodity exchange fund and used for either gaining exposure or hedging gold commodities. Seasoned investors look at ETFs as a good way of strengthening one’s portfolio. This is because the Gold ETF can act as a reduction of risk if an investor possesses a portfolio with high factor risk. Invesco DB Gold (DGL), iShares COMEX Gold Trust (IAU) and SPDR Gold Trust (GLD) are examples. 

  • Leveraged Gold ETFs: Fund providers such as ProShares and Direxion are specialists when it comes to leveraged products over a multitude of sectors, assets, and markets. They also provide leveraged gold ETFs in the market which is some of the most actively traded. Leveraged Gold ETFs however, suffer from expense ratios near 1% and high volatility. 

  • Gold Mining Stocks: Gold mining stocks refer to stocks of companies that include gold mining companies who deal in mining as well as selling. By purchasing a stock of a gold company, traders and investors are effectively purchasing a stake in the ownership of the company. Thus returns are dependent on the company’s performance. There are over 300 gold mining companies whose stocks are publicly traded with some of the best examples being the FTSE Gold Mines Index, NYSE Arca Gold BUGS Index and S&P/TSX Capped Gold Index. 

Conclusion 

Trading in the gold market can offer significant profitability, especially in the long-term. Traders should take some time to analyze both the short term and long term prospects. They should choose a venue for their risk-taking, which is focused on easy trade execution and focus on high liquidity.


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