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Invest in Gold
Invest in Gold

How to Invest in Gold CFDs 

Gold is a popular precious metal that has always been in demand and attracted investors. Many less-experienced traders consider putting their money into this asset, and there are many ways to buy or invest in gold, each with its advantages and disadvantages. In this article, we'll analyse them and determine which methods are used by investors and traders.

Why Invest in Gold?

There are several reasons why people invest in gold:

Gold is a popular precious metal that has always been in demand and attracted investors. Many less-experienced traders consider putting their money into this asset, and there are many ways to buy or invest in gold, each with its advantages and disadvantages. In this article, we'll analyse them and determine which methods are used by investors and traders.

Why Invest in Gold?

There are several reasons why people invest in gold:

  1. To protect against inflation
  2. To diversify their investment portfolios
  3. To speculate on rising or falling prices

Protection against inflation is the main function of gold as an investment instrument. Even stable currencies such as the US dollar or the Japanese yen depreciate over time. Bank deposits only partially offset inflation, though interest rates have a hard time competing with inflation in the long run.

Over the years, gold has become more expensive, relative to both fiat money and most goods and services. Today, an ounce of gold can buy more wealth than it could 100 years ago. On the other hand, 100 years ago, $1,000 was a fortune. Today, the cost of an ounce of gold is below the average salary in Europe.

Diversification of an investment portfolio usually attracts the interest of experienced investors, although a newer trader with some skills and experience can also protect against risks. When a portfolio consists primarily of stocks or futures, gold tends to be the most stable asset, historically maintaining its value over the long term. In periods of economic instability, when stock markets fall, the price of gold, on the contrary, increases, compensating for losses due to the fall in share prices.

While gold is considered a stable asset, it can be volatile in the short term.

The variability of gold's exchange rate allows speculative traders to earn money. Unlike stock market shares, gold is available for trading 24 hours a day, five days a week. In the forex market, gold is one of the most popular assets, behind only EUR/USD and a few more major pairs.

How to Invest in Gold CFDs 

gold price

Methods of investing in gold differ depending on the instrument (asset) type. These can be both physical assets (gold coins, gold bars, jewellery products, etc.) and financial instruments (gold futures, gold CFDs, ETFs, etc.).

Buy Gold Bullion and Coins

Gold bullion and coins are the most popular types of investment in physical gold. Theoretically, jewellery products can be considered investment tools, but they are less profitable. In most cases, they'll be sold at a significantly lower price, even if the price of gold rises.

Investments in Gold Bars

Gold bullion (bars) is the most popular way to store physical gold for investment purposes. They are issued by banks or refiners that put a special mark on the ingot, which confirms its quality and plays an important role in the subsequent resale. Ingots from banks such as Credit Suisse and Commerzbank can be easily sold worldwide, while ingots from banks in developing countries are less valuable and liquid.

Advantages and disadvantages of investing in bullion:

Pros

Cons

- Easy to purchase

- No binding to the bank/broker/bourse

- Selling price is lower

- You have to take care of its safety

Investments in Gold Coins

Gold coins aren't only an investment asset but also a collector's item. They can be issued by modern banks and be a historic relic. The coins are much easier to buy, and the price is more transparent and stable. With the advent of online stores, buying gold coins has become quite simple, but such transactions often attract con artists. Even if you're an expert, there's still the risk of being fooled since the transactions take place online.

Advantages and disadvantages of investing in coins:

Pros

Cons

- No binding to bank/broker/exchange

- Can be sold for a higher price immediately after purchase

- Low liquidity

- You have to keep the coins safe

- Higher probability of getting conned

- You must be an expert numismatist

Trade Gold

Trading gold on stock exchanges is the easiest and fastest way to invest in the precious metal. To start trading gold on the stock exchange or even make a single deal to buy it for long-term storage, you'll need a broker. Theoretically, the investor can go to the exchange personally, but that will entail additional costs for a brokerage certificate. In most cases, this decision will be unprofitable.

Advantages and disadvantages of gold trading:

Pros

Cons

- Speed and ease of purchase

- Asset liquidity

- Variety of assets

- You need to have a broker who will charge a commission

- Higher risk due to leverage

Gold Certificates 

A gold certificate is a kind of security that confirms the right of the owner to a certain amount of actual gold. Gold certificates were very popular in the US after the Civil War and up until the 1930s. During this period, they even served as a substitute for money. It was easy because the dollar was tied to gold back in those days. 

In today's world, gold certificates have become much rarer. They are issued by only a few companies and aren't as liquid as they were previously. However, they still perform their main function: the certificate owner can demand both the issuance of physical gold in the amount specified on the certificate and payments in fiat money at the current rate for gold.

Advantages and disadvantages of gold certificates:

Pros

Cons

- Easy to buy and store

- Direct investment 

- Bound to the issuing company

Gold Futures

Gold futures are a contract to buy gold in the future at a specific price. Legally, the owner of a futures contract has the right to receive a certain amount of actual gold after a certain period of time (usually three months). In fact, the purchase of real gold never happens, and the trader sells futures before they expire.

Futures provide a potential opportunity to speculate on gold's price without physically buying it.

Advantages and disadvantages of gold futures:

Pros

Cons

- Speed and ease of purchase

- Asset liquidity

- You need to have a broker who charges a commission

- Higher risk due to leverage

Gold futures are traded on commodity exchanges such as the Chicago Mercantile Exchange, The London Metal Exchange or Commodity Exchange. To trade on these exchanges, it's necessary to enter into a contract with a broker who will provide access to the trading floor. 

Gold-Backed Exchange-Traded Funds (ETFs)

Gold-backed Exchange-Traded Funds (ETFs) are funds invested with raised capital in assets with gold (physical gold, futures, etc.). Each of these funds issues its shares traded on the stock exchange. When an investor buys them, they become part-owner of the fund's capital; i.e., the fund's acquired gold. 

Investing in gold-backed ETFs isn't a direct investment in gold. The investor is largely dependent on the decisions made by the fund's traders. However, the value of the fund's shares directly correlates to the price of gold. If the gold grows, ETFs will also grow, regardless of which instruments were used by gold traders to invest the fund's money.

Advantages and disadvantages of gold-backed ETFs:

Pros

Cons

- Speed and ease of purchase

- Asset liquidity

- Diversification of risks

- You need to have a broker who charges a commission

- Investments in gold aren't direct

Gold CFDs

Gold CFDs (contracts for difference) are a tool that allows traders to trade gold on the market. Just like futures, CFDs aren't traded by physical assets. The only thing that matters is the opening and closing prices; all other factors are removed to simplify the process.

Advantages and disadvantages of gold CFDs:

Pros

Cons

- Speed and ease of purchase

- The broker's account opens in just a few minutes

- Minimum deposit requirements

- Asset liquidity

- You can make profits even on minimal price fluctuations

- You need to have a broker who charges a commission

- CFDs is a complex product

- Higher risk due to leverage

How to Trade Gold

To understand how gold trading works, let's look at the example of gold CFD. To start trading gold, it's necessary to go through the following steps. 

Step 1. Opening an Account with a Broker

The first thing a trader will need is an account with a broker, which will allow you to enter the exchange and start trading. Almost all brokers provide an option to trade gold CFDs, but you choose wisely. There are several factors that you need to assess before opening an account:

  1. Reliability. The company must have a regulatory licence and a good reputation. It's preferable that the broker has worked in the market for at least 10 years.
  2. The trading platform. The terminal should be convenient and fast.

The Libertex platform is user-friendly.

Step 2. Allocation of Funds for Investments

The investor should soberly assess the risks when deciding to trade on the stock exchange. Active trading is a risky business, so it's a sound idea to allocate a reasonable amount of money. This way, the trader can assume the risk of losing it without serious damage to their financial position. 

Step 3. Practising Training

Before you start making transactions on the stock exchange, you need to undergo training. Most basic trading courses are free of charge, offered either by brokers or by large Internet portals working with brokers on partnership programs. Additionally, you can read trading literature for beginners. During the training, it's necessary to practice on a demo account.

Step 4. Choosing Your Trading Strategy

The programme for almost any basic course includes studying simple trading strategies. However, for real trading, you'll need a more advanced system. Basic strategies are good for training; they help you understand the principles of system trading. Based on simple strategies, traders often develop their own original systems.

For example, you can build a trading strategy on technical or fundamental analysis. In the first case, indicators and graphical constructions will help the trader analyse the price and make decisions. In the second case, it'll be necessary to analyse macroeconomic factors and news related to gold.

Gold CFDs Trading

Watch Out for Central Bank Buying or Selling

Central banks are the largest and the strongest players (market makers) in the market. Central banks often make buy and sell trades with gold, controlling the country's gold reserves. You can predict how the price of gold will change by tracking them.

Consider the Demand for Gold Jewellery and Industrial Demand for Gold

The jewellery industry, and the industry as a whole, are consuming over 90% of all gold production. This is one of the main fundamental and objective factors influencing the price of gold. The higher the industrial demand, the more reasons for its price to grow.

Correlation with the Japanese Yen

The Japanese yen, like gold, is considered a sanctuary asset. In times of economic instability, traders invest in these two assets, while in periods of growth. Gold and yen rates correlate, i.e., they move in the same direction. By analysing the exchange rate of the yen, it's possible to predict the future price of gold.

Gold Is Volatile

In the short term, gold is often more volatile than currency pairs. The asset price can change by 100 points in just a few minutes, bringing both big profits and big losses, so newer traders may want to avoid using large leverage.

Trading from Support/Resistance and Fibonacci Levels

Gold is sensitive to price levels. One of the best trading strategies based on technical analysis is to trade from support/resistance and Fibonacci levels.

Conclusion

Gold is an exciting asset. Trading in gold CFDs on the exchange requires knowledge and skills that are achieved through constant practice. But please note that trading CFDs with leverage can be risky and can lead to losing all of your invested capital. To avoid losses during the first stage of investment activity, it's recommended to train. If you want to practise your trading skills you can open a demo account and when you feel ready you can move on to real trading. Libertex offers a free demo account. The interface is user-friendly even for relative newcomers. 

 

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