How to trade gold
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 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.