Gold is a precious metal which is widely traded in the commodities market around the world. When you are trading or investing in gold, it means you are taking a position on the future price movement of the gold.
When you invest, you are taking ownership of gold, if prices of the yellow metal rises, you make profit by selling it higher.
Trading gold means you are buying and selling to make profit out of rising and falling prices. Buying and selling of gold as a financial asset is referred to as gold trading. Which means the trader wants to speculate on the price of gold rising or falling.
As an investor you can profit only by going long in stocks of gold business companies or in GOLD ETFs. Whereas, as a trader, you can go long in a rising market and go short in a falling market.
In this article, we will tell you different ways to trade Gold, factors that influence the prices of gold and how gold is traded.
What drives the price of gold?
Prices of gold are influenced by supply and demand dynamics. Traders and investors closely watch all these factors to make informed decisions.
Here are major factors that impacts supply and demand of gold;
- Global economic conditions
- Interest rates
- Geopolitical events
- Reserve Bank Of India (RBI)‘s policies
- Political events
- Strength of US dollar index
What is gold trading and how to trade and invest in gold?
Gold can be traded in several ways.
Anyone can trade physical gold, stocks of companies dealing with gold as their business, Gold ETFs and future contracts.
Gold can be kept in physical form by buying gold bars, coins and jewellery. Anyone can buy and sell gold bars or coins in physical form to make profit. This is the most popular form of investment among individuals in India and around the world.
However, it has drawbacks such as higher capital for investment, storage, transportation and insurance.
Many investors prefer investing in stocks of listed companies whose main business is selling gold products such as jewellery. By investing in these companies, investors avoid holding gold in physical forms.
Another best option many investors prefer instead of holding physical gold is buying and selling of gold exchange traded funds (ETFs). Gold ETFs are also traded in stock exchanges. Anyone interested can buy and sell Gold ETFs by opening trading and demat accounts with a SEBI approved broker.
On various commodity exchanges such as The Multi Commodity Exchange of India Limited (MCX), you will find gold futures contracts for trading along with crude oil, silver, natural gas and other commodities.
Forex market is different from the commodities market. In India, you can not trade directly in the forex market. However, interested traders can trade in futures and options of currencies on the NSE and BSE with a trading and demat account.
Anyone can trade gold futures contracts to speculate on the price movements of gold without holding Gold in physical form. A future contract is an agreement to buy or sell a specific asset at a future date at a predetermined price.
Gold Option contracts are similar to future contracts but it has no obligation to execute the trade when buying. We have two types of option contracts: Call options and put options.
Holder of a call option has the right but not the obligation to buy the yellow metal, Gold. In put option, the holder has the right to sell gold but has no obligation.
Please note, trading in gold requires a high level of skills and involves a significant amount of risk. You need to have a very good understanding of Gold market dynamics, commodities market and technical analysis. Therefore, we suggest having a better understanding of market and risk management techniques before getting into trading or investing in gold.
The biggest problem with trading or investing in gold is you have to monitor the entire market and factors that can influence the price.
What options are available in India to buy and invest in gold?
Currently, we have two options to invest or buy gold: paper and physical.
In physical form you can own gold jewellery, coins and bars. The major concern here is safety, costs and transportation.
If you are interested in investing in paper form, then you have options like Gold exchange-traded funds (ETF) and Sovereign Gold Bonds (SGB).
Gold ETF can be bought and sold on a stock exchange like NSE and BSE with gold as the underlying asset. To buy and sell through a stock exchange, you need to have a trading account with a stock broker and demat account.
Sovereign Gold Bonds (SGB) are issued by the government of India. Time to time the government opens a window for the fresh sale of SGB to interested investors.
In order to trade or invest in gold, you need to understand the fundamentals that move the price of gold and market psychology, then you decide the best way to trade or invest based on your risk profile.
You can make profit only when your prediction of gold price is correct. Which means, by applying your strategy you can predict whether the value of gold will rise or fall.
Gold trading can give you good profit but it involves risks such as factors influencing supply and demand of gold and physical gold storage costs.
The force behind the market move is supply and demand of gold.
Factors that can impact supply and demand dynamics are mining production, inflation, greed and fear, value of US Dollars, inflation and interest rates.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
