Why are investors so interested in trading gold?
If you are an investor who takes a keen interest in the commodities market, and more specifically precious metals, gold is definitely an asset that may interest you, due to several factors. The first advantage in trading gold is that this value presents a very high volatility compared to other stock market assets. This means that the movements recorded by gold prices are very often large in scale and therefore allow for short-term strategies. But it also represents a greater risk.
Although gold is no longer really considered a safe haven, it remains an investment of choice for institutions such as banks, especially in times of high inflation because gold is not sensitive to this factor and continues to keep pace as currencies lose value.
Finally, gold is an asset that is very responsive to the phenomenon of supply and demand. It's therefore possible to trade this value in the longer term, based on the fact that production is currently reaching its limits, while demand may increase further due to its use by industry, especially the Chinese industry which is expanding rapidly.
As you probably already know, gold is considered a safe haven in the investment world. This means that it tends to maintain its price or even increase in value when other financial markets are in difficulty. This was particularly the case during the start of the economic crisis in 2008 with a real surge in the price of an ounce of gold as well as more recently during the Covid-19 crisis.
In this sense, both long-term and short-term strategies are possible with gold. However, it is better to buy gold at the right time if your investment horizon is longer than a few years, meaning buy it when its price is relatively low and therefore most likely to earn points.
To trade gold for the long term, it is common to buy physical gold either online or from a bank or dealer, of course taking into account the costs of storage and preservation of your gold. It's still possible to take a long position in the gold market with CFDs, but, it is better not to take out leverage effect in this case.
Trading gold on the stock market and how it works:
There are several ways to invest in gold on the stock market. For example, banks offer gold accounts that allow you to hold a certain amount of gold with the aim of reselling it later. You can also buy and store physical gold for the same purpose. However, these two solutions have the drawback of having high costs and low profitability.
Trading gold through CFDs is also possible and increasingly popular. This method, offered by online brokers, allows you to speculate on the rise or drop on the price of gold by using what are called "contracts for difference" and without having to buy physical gold.
There seems to be more and more online trading platforms, also called “brokers” or “online brokers” that are integrating gold into their available assets. The principle of these platforms is precisely to allow everyone, individuals and professionals alike, to speculate on different assets such as currencies, stock market assets and even commodities, which are particularly popular assets.
By registering on one of these platforms, you will be able to deposit money and use this capital to trade up and even down in gold prices according to the strategies and analyses you have set up. But these platforms are not suitable for novice traders because they require some knowledge of the market.
Once you have made your initial deposit, you will be able to trade directly in the market through what are known as CFDs or contracts for difference. When you think the gold price is going to rise, you simply trade the amount you want to buy on the asset, and sell your position when the price has risen sufficiently.
Conversely, if you think that the price of gold will drop, you can take a short position and sell your position when the price has dropped sufficiently.
How to Perform a Fundamental Analysis of Gold:
A fundamental analysis is, as we mentioned above, one of the types of analysis that is essential for trading gold and understanding its current and future trends with technical analysis.
This analysis is based more specifically on the study of various factors external or linked to the gold market, which are known to influence the price of this commodity. Check out some simple examples of elements that you must integrate into this fundamental analysis before buying gold on the stock market:
- The value of the Dollar which is inversely correlated with the value of gold. This means that when the Dollar rises, gold tends to drop as it becomes more expensive for investors with other currencies. Conversely, when the dollar drops, gold tends to appreciate that. But this indicator, like the others, is inconclusive if used alone.
- Economic news should also be followed closely because it seems that for some time the effects of the European crisis have a negative impact on gold prices. Conversely, when good news hits the European market, investors tend to buy gold again.
- Finally, global economic growth also has a positive impact on gold prices because the better the industry performs, the more it uses resources such as precious metals. Here you should follow emerging countries such as Asian countries and especially China more specifically, which is a large consumer of gold.
Of course, the list that we have just mentioned isn't the only one that you'll have to take into consideration when carrying out your analysis before buying gold on the stock market. In fact, depending on the period and the specific global economic context, you'll find other fundamental indicators that may be useful to you in the context of this analysis. Overall, you should make sure to follow all the news in this market very closely and try to identify events or publications that have had a real impact on the price per ounce of gold in the past.
But also remember that fundamental analysis is not the only essential analysis to try to anticipate the next gold prices. It's important to systematically use a technical analysis which, as you'll see, is based on the study of the value's graphic movements.
How to perform a technical analysis of the price of gold:
As we mentioned above, gold is an asset that shows very high volatility in the market. This means that its price movements can be rapid and of a significant magnitude. Therefore, technical analysis is essential before taking any position on the price of gold and even before any purchase of physical gold. This analysis will allow you to interpret the historical gold stock charts in order to spot signals of rising or dropping prices, and also identify a trend, its continuation or its probable reversal and even to determine how volatile the market is over a period of time or at a specific time.
The stock charts that are offered by online brokers are usually customizable and allow full technical analysis. It is possible to display several technical indicators there without having to calculate it beforehand leaving you free to interpret them according to your knowledge.
Among the indicators most used by gold traders, there is of course the MACD, moving averages, Bollinger bands or even pivot points as well as support and resistance levels.
How to choose your intermediary to buy gold online?
Now that you have understood how to trade gold online through an internet broker or broker, you'll have to choose which platform you're going to use. This choice should be the subject of serious consideration and should not be made lightly. It's best to compare different points such as:
- The fact that the broker is licensed
- The tools available (analysis, information flow, etc.)
- The deposit and withdrawal conditions
- The quality of the platform and its simplicity
When you trade commodities like an ounce of gold through an online trading platform, the cost of your transaction is set by the broker and applied in the form of spreads. But what are these spreads really and how are they applied to your CFD trades? Here are some answers that will help you see more clearly and understand how much your operations are really costing you.
Whether it's trading commodities like gold through CFDs or Forex currency pairs, the spread has the same function and definition. The difference between the purchase price of gold at a given time and its sale price at the same time is commonly called "spread". For the trader, these are fees directly charged by the broker used on the transaction carried out.
To better understand, let's take a tangible example:
When you go to your online trading platform, you can see two values associated with the Gold CFD like:
Gold: Buy 1800.50 Sell 1800
You therefore calculate the spread by the difference between the purchase price and the sale price and you obtain a cost of 50 pips per unit. This means that if you bought an ounce of gold and resold it at the same time, you would lose 50 pips on the trade made. So you really should take this spread into account during your operations.
In plain English, it's fair to say the CFD spread is what represents all the costs associated with trading gold online.
The fees charged by other types of platforms where you can buy physical gold for example are different and are sometimes not expressed in this form. You need to always compare the different solutions available to you in order to choose the one that will best meet your expectations.
Who is online gold trading for?
Here you'll find details on the types of investors who may be interested in the online gold market. It's important to know that trading gold by CFDs or another trading instrument is not an activity suitable for beginners. It is necessary to have a greater understanding and a good grasp of the gold market before embarking on an activity of this type.
Like all financial transactions, speculating in gold presents risks and, without being aware of these risks or without putting in place a real and thoughtful trading strategy, it is common to make mistakes that may result in the loss of some or all of the invested capital.
Among the elements that can present a significant risk, there's the leverage effect offered on gold by CFD brokers. This leverage makes it possible to increase the amount invested and therefore potentially the gains made, but it also increases the risk with the same importance.
When is the best time to buy gold?
When someone wants to take a position in the gold market, the most delicate question faced is knowing when the best time to buy gold is ...
For this, it's particularly necessary to look carefully at the monthly charts on gold. Some traders, for example, use the lowest average and wait for the gold price to get closer again, hoping that this signals an uptrend. With the charts, it is possible to set up two different strategies on the purchase of gold. You can wait for the price of gold to be at its lowest in order to buy it at the best price or wait for an uptrend to be well established and confirmed. This choice will largely depend on your trading horizon.
As mentioned above, the general economic climate is extremely influencing gold prices. When looking at the historical data of these prices, you notice that the price of the yellow metal tends to increase as the world economic situation deteriorates and if the other indicators are also convincing.
This phenomenon is due to the fact that private or institutional investors want to secure their deals and their investments in the event that other markets collapse. In this sense, other more psychological data may indicate a forthcoming rise in gold prices.
Ultimately, in order to get an idea of what the future of gold may be, you must pay particular attention to economic and financial news. The more this news is negative and made public, the more investors will be afraid and tend to withdraw from the markets. However, these investors will sometimes reinject their money in a more secure market, that of gold.
Another external indicator is to be favoured when you want to buy gold. This is of course the Dollar. Since gold is valued and therefore bought in dollars, wait until the EUR/USD parity is important in order to profit from gold at the best exchange rate. In addition, a general drop in the dollar against competing currencies is often conducive to mass investment leading to an appreciation in gold prices.