Gold is a popular precious metal that has always been in demand and attracted investors. Many novice investors have begun thinking about putting their money into this asset. There are many ways to buy gold or invest in it, and they all have their advantages and disadvantages. In this article, we will analyze the most popular ways to invest in gold, and determine which methods are the most profitable.
Why Invest in Gold?
There are several chief reasons why people invest in gold:
- To have protection in case of inflation.
- To diversify their investment portfolio.
- For speculative profit based on the rise or fall in price.
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 and certainly don’t allow you to generate a decent income.
Over the years, gold has become more expensive, not only compared to fiat money, but also in relation to most goods and services. Today, an ounce of gold can buy more wealth than 100 years ago. On the other hand, 100 years ago, $1,000 was a fortune. Today, it is below the normal salary given in an average European country.
Diversification of an investment portfolio usually attracts the interest of experienced investors, although an advanced beginner can also acquire such protection against risks. When the portfolio consists mainly of stocks or futures, gold will be the most stable and reliable asset in it. In periods of economic instability, when stock markets fall, the price of gold, on the contrary, increases. The increase in the value of gold in the investment portfolio, partially compensates for losses due to the fall in share prices.
Despite the fact that gold is considered to be a stable asset, in the short term its rate is quite volatile. This gives the investor an opportunity to earn money.
Variability of the gold exchange rate allows traders-speculators 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, yielding only EUR/USD and a few more major pairs.
How to Invest in Gold Like a Pro
Methods of investing in gold differ depending on what type of instrument (asset) is used for this purpose. These can be both physical assets (gold coins, gold bars, jewelry products, etc.) and financial instruments (gold futures, gold CFD, ETFs, etc.).
Buy Gold Bullions and Coins
Gold bullions and coins are the most popular types of investment in physical gold. Theoretically, jewelry products can be considered as investment tools, but they are objectively less profitable. Their selling price will, in most cases, be significantly lower than the purchase price, even if you do this after many years when the gold rises in price.
Investments in Gold Bars
Gold bullions (bars) is the most popular way to store physical gold for investment purposes. Either banks or refiners issue bullions. Each producer puts 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 around the world, while ingots from banks in developing countries are less valuable and liquid.
Advantages and disadvantages of investing in bullion:
Investments in Gold Coins
Gold coins are not only an investment asset but also a collector's item. Gold coins can be issued by modern banks as well as be a historic relic. The first coins are much easier to buy, and the price is more transparent and stable. Nowadays, with the advent of online stores, buying gold coins has become quite simple, but such transactions often attract con artists. Even if you are an expert, there is still the risk of being fooled, as the transactions take place online.
Advantages and disadvantages of investing in coins:
Trading gold on stock exchanges is the easiest and fastest way to invest in precious metal. To start trading gold on the stock exchange, or even make a single deal to buy gold for long-term storage, you will need a broker. Theoretically, the investor can go to the exchange personally, but it will entail additional costs for a brokerage certificate. In most cases, this decision will be unprofitable.
Advantages and disadvantages of gold trading:
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 U.S. after the Civil War and up until the 1930s. During this period, they even served as a substitute for money - it was easy because back in those days, the dollar was tied to gold.
In today's world, gold certificates have become much rarer. They are issued by only a few companies and are not as liquid as they were previously. However, they still perform their main function: the owner of the certificate 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:
Gold futures is 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 an opportunity to speculate on the price of gold, without physically buying it. Most often, traders’ open deals to buy or sell, at the beginning of the trading day, and at the end of the day close these deals.
Advantages and disadvantages of gold futures:
Gold futures are traded on commodity exchanges such as the Chicago Mercantile Exchange, The London Metal Exchange or Commodity Exchange. In order to trade on these exchanges, it is 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, which are traded on the stock exchange. When an investor buys shares of this type of fund, he becomes part-owner of the fund's capital; i.e., the gold that the fund has acquired.
Investing in gold-backed ETFs is not a direct investment in gold. In this situation, 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:
Gold CFD (contract for difference) is a tool that allows traders to trade gold on the Forex market. Just like futures, CFDs are not traded by physical assets. The only thing that matters is the opening and closing prices; all other factors are removed to simplify the process.
Deals with CFDs are the easiest way to make money by changing the price of gold. Only one thing is required from the trader - to make the correct forecast of future price movement.
Advantages and disadvantages of gold CFD:
How to Trade Gold
To understand how gold trading works, let's look at the example of gold CFD. This method is best for novice investors. To start trading gold and make earnings, it is 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 Forex broker, which will allow you to enter the exchange and start making deals. Almost all Forex brokers provide an opportunity to trade gold CFDs, but you should be wise in your choice of a broker. There are several factors that you need to assess related to the broker before you open an account:
- Reliability.The company must have a regulatory license and a good reputation. It is preferable that the broker has worked in the market for at least 10 years.
- Trading conditions. The less the broker's commission is, the more profit you will get from the deal.
- The trading platform. The terminal should be convenient and fast.
For example, the Libertex platform from the Forex Club broker is considered to be one of the most convenient and friendly to beginners. Moreover, the Forex Club has been operating in the market for over 20 years and has a good reputation in the trading community.
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 is a reasonable idea to allocate a reasonable amount of money. This way, the investor can afford to assume the risk of losing it without serious damage to his financial position. For example, if an investor wants to create a balanced investment portfolio, it is optimal to allocate 20% of the capital for gold CFD trading.
Step 3. Trading Training
Before you start making transactions on the stock exchange, you need to undergo basic training. Sure, 2-3 weeks is not enough time to make you a guru at exchange trading, but an investor, who has passed a basic course, will not make silly mistakes. Such courses teach basic techniques of price analysis, market trend definition, management principles, etc.
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 is necessary to practice on a demo account.
Step 4. Choosing Your Trading Strategy
The program provided in almost any basic course includes the study of simple trading strategies. However, for real trading, you will need a more advanced system. Basic strategies are good for training; they help you to understand the principles of system trading. On the foundation of simple basic strategies, traders often develop their own, original systems.
For successful gold trading on the exchange, an original authoring system is required.
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 to analyze the price and make decisions. In the second case, it will be necessary to analyze macroeconomic factors, as well as news related to gold.
Tips for Gold Trading
Let's consider a few tips for those who want to start trading gold and making profit.
Watch Out for Central Bank Buying or Selling
Central banks are the largest and the strongest players (market-makers) in the Forex market. Central banks often make «buy and sell deals» with gold, controlling the gold reserves of the country. You can predict how the price of gold will change by tracking such deals.
Consider the Demand for Gold Jewelry and Industrial Demand for Gold
The jewelry industry, and the industry as a whole, are the main consumers of gold - together they consume more than 90% of all production. This is one of the main fundamental and objective factors influencing the price of gold. The higher the industrial demand for gold, 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 they prefer something riskier. Gold and yen rates correlate, i.e., they move in the same direction. Analyzing the exchange rate of the yen, it is 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. This movement can bring both big profits and big losses, so novice traders need to be careful not to use 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.
Gold is an interesting and promising asset, and trading it can bring great benefits to the investor. Successful trading in gold, on the exchange, requires knowledge and skills that are achieved through constant practice. In order to avoid losses during the first stage of investment activity, it is recommended to train on a demo account for the first few months and then move on to real trading.
The demo account is available for free on the Libertex platform from Forex Club. The platform was developed exclusively for the Forex Club and is considered to be one of the most convenient and simple to use on the Forex market. It will not be difficult to understand the interface, even for a beginning trader. In addition, the Forex Club has a free training course on the basics of trading, which includes using the platform.
Why to trade with Libertex?
Libertex offers all its affiliates:
- access to a demo account free of charge
- technical assistance to the operator 5 days a week, 24 hours a day
- leverage up to 1:500
- operate on a platform for any device : Libertex and Metatrader 4 and 5
- no commissions for extractions in Latin America