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Gold trading

Trading commodities and precious metals like gold is a popular way of diversifying a portfolio. Here's your tutorial for trading the gold market.

Why trade gold?

Diversification

Seasoned traders mitigate risk by diversifying their portfolios. Trading in commodities like gold is considered an excellent way to do this, because gold prices tend to negatively correlate with stock markets.

A hedge against inflation

While currencies lose value over time due to inflation, gold is inflation-proof. Even during the financial crisis that struck global markets in 2008 and after, gold prices were barely affected.

Store of value

About 95% of gold in the world is held as jewellery or in bullion vaults, and the supply is growing at a very slow pace. The laws of supply and demand mean that its value shows limited volatility

What affects gold prices?

 

Central banks 

These institutions buy and sell gold to regulate their reserves and stabilize the value of their national currencies. This consequently impacts gold prices.
 

Crude oil

Crude oil and gold are strongly linked as their trade is denominated in dollars. A rise in the price of crude oil increases inflation, which in turn effects the price of gold.
 

US Dollar value 

Since gold is quoted in US Dollars, an increase in the value of dollar automatically adds negative pressure on the gold prices. 
 

Stock markets

A stock market decline often causes traders to turn to gold and in turn push its price higher.

Gold market trading tips

Trading gold in practice 

Your analysis leads you to conclude the price of gold will appreciate.

You buy 1 lot (100 oz) of XAU/USD at the price of 1,184.60.  One lot equals $100 for every $1 movement in the price of gold.

Winning scenario

The interest in gold spikes and a couple of days later the price is $1,189.70. You decide to sell and lock your winnings. Your profit is calculated as follows: (1,189.70 – 1,184.60) x $100 = $510.

Losing scenario

The price of gold does not move your way and the day after the price trades at $1,180.30 . You decide to close the position and cut your losses. The loss in this case is: (1,184.60 - 1,180.30) x  $100 = $430

Practice trading metals with £50,000 virtual funds
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