Gold is a bright, yellow, malleable and ductile metal found in nature. It is usually found in rock veins, gold nuggets, grains, electrum or alluvial gold. Electrum refers to a natural alloy of gold, silver and small amounts of copper and other metals. Gold exploration and mining is probably as old as man because history has it that gold was used as money around 700 B.C. It has always been treasured as a rare and expensive jewel, so, investing in Gold dates backs to several centuries ago.
Gold appears in the ‘periodic table of elements’ as a transition metal and a ‘group 11 element’ with an atomic number of 79. Its chemical symbol ‘Au’ is derived from its Latin name ‘Aurum’. It is a good conductor of heat and electricity; it is also resistant to corrosion. Gold is one of the precious metals used as a treasure suitable for preserving wealth and also in jewelry. Its many properties have also made it useful in medicine, dentistry, electricity, gold leafing and Aerospace.
Investing in Gold
Gold is traded as a hard commodity because it is usually mined and extracted from its raw form. In our digital world, there are several options when it comes to investing in gold. Below are some of the available methods:
Spot Gold
Gold bullion is gold in form of a bar or coin with an engraved stamp on it stating its purity level, weight, etc. It can be bought from dealers, banks, goldsmiths, pawnbrokers or online. There are several reasons why some investors prefer to buy and keep the physical gold. Some of them are:
- It can be used to hedge against financial crisis.
- Physical gold is beautiful, shiny and portable. You can keep gold bullions worth millions in a small bag, so, you can use it to store up your wealth for future use.
- It does not corrode and cannot be destroyed by disasters such as fire, storm, wind, etc.
- It can easily be sold anywhere, anytime or even online.
Investing in gold bullions can be expensive when compared to other investment options. Also, the gold bars or coins can be stolen by burglars or even friends who are aware of its existence.
Gold Stocks
There are several companies that are into exploration, extraction, refining and streaming of gold. Most of the big mining companies are listed on stock exchanges where their shares are traded. Buying and trading the shares of companies that are dependent on gold is another way of investing in gold commodity. Stock investors usually buy and keep the company shares in order to enjoy dividends or to sell at a later date if the price increases.
Gold futures contracts
These are standardized contracts offered in exchanges such as the New York Mercantile Exchange (NYMEX); where 100 troy ounces of Gold represent one contract and the price is quoted in USD. A gold futures contract is an agreement between two parties to buy or sell a specified contract size of gold at an agreed price and on a future date. Depending on the contract type, gold futures contract can be cash settled or the buyer will take physical delivery when the contract expires.
This investment method suits hedgers and speculators; a buy position is an obligation to accept delivery while a ‘sell’ position of an obligation to deliver gold at a later date.
Speculators usually seek to make some profits from the price difference of gold and they do not receive deliveries, so, they usually set off the contract before expiry. Investing in gold futures supports leverage trading, which means that the buyer only deposits a fraction of the full market value of the commodity value. Gold futures are risky as the trader may lose his a significant part of his investment.
Gold Exchange traded funds (ETFs)
These are a pool of funds consisting of gold as the major asset and it tracks the price of gold. They work like stocks and are traded on the stock exchange. You do not own the physical gold but only trade its price movements. It has the following advantages:
- It is cheaper than buying physical gold.
- It can be sold at any time so long as the exchange is in trading session.
- Gold ETFs are useful for assets diversification or for hedging against losses.
- It is tax efficient.
Gold ETFs are exposed to the market fluctuations and therefore risky. Management fees are also charged.
Gold options
Gold options are contracts between two parties which gives them the right, not the obligation to buy and sell a defined quantity of gold at an agreed strike price on a future date. The pricing is derived from the underlying gold price. ‘Put options’ gives the right to sell while ‘call options’ gives the right to sell. Gold options contracts are available for trading on exchanges like NYMEX, Tokyo Commodity Exchange, etc. Gold options are also traded in the OTC market, usually through online brokers.
Gold Contract for differences (CFDs)
Gold CFDs are contracts of differences to buy or sell a certain amount of gold while the profits or losses are determined by the change in price of the underlying gold commodity. The CFD trader never owns the physical metal but only aims to make potential profits from the fluctuating prices of gold. CFDs are derivatives because it pricing is obtained from the price of gold commodity in real-time.
CFDs are not traded on standard exchanges; rather, they are OTC products that are offered by online CFD brokers. These brokers script the ‘contract specifications’ and provide the software ‘trading platforms’ on which all client trades are placed. Two prices are quoted for all available assets; the ‘bid’ and ‘ask’ price. The trader opens a ‘buy position’ at the ask price when he is speculating an increase in price. He opens a ‘sell’ position at the bid price when he predicts a price decline.
Most of the trading platforms provide some sort of tools to support the traders with technical analysis, etc. Brokers may offer their proprietary platform or third-party platforms. Some trading platforms (like the renowned MT4) are user friendly, scalable, versatile and loaded with tools for trading and analysis.
Investing in Gold CFDs with ROInvesting
ROInvesting is a Cyprus-based online broker that offers CFDs on forex, stock, indices, cryptocurrencies and commodities. We are regulated by CySEC and so, we comply with clients’ funds segregation policy and are members of the ‘Investor Compensation Fund (ICF). We provide the trusted and reliable ‘MT4 trading platform’ to our clients for all trading activities. Our mobile app is also handy to support trading on the move.
Gold is one of the precious metals that we offer for trading on our trading platforms. It is paired with the dollar and traded as ‘XAUUSD’. To commence investing in gold CFDs, below are the steps to guide you:
- Click the ‘open account’ button on the top right hand of this page.
- Fill the form that will be displayed.
- Make a deposit.
- Upload the requested verification documents and wait for the new account to be approved.
- When approved, download the MT4 platform on desktop or mobile.
- Open either ‘buy’ or ‘sell’ position on the gold assets if this is the asset you wish to trade.
- You can monitor the trade on the ‘trade’ tab.
- Close the position to secure your potential profits or losses.
Advantage of investing in Gold CFDs
Lower start-up capital
CFDs are characterized by leverage trading which is a tool that gives the trader a greater market exposure by allowing him to open positions that are much more than his account balance. For example, if a trader’s account balance is €2,000 and his broker offers him leverage of 1:10, he can open trade positions that are worth €20,000. This can help him open more positions and increase his profit potentials but leverage will also amplify his losses if the trade goes against his position.
Trading opportunities abound
Unlike a gold bullion trader who buys and keeps gold with the hope of selling when the price appreciates, CFD traders have opportunities in both rising and falling markets. On the broker trading platforms, the CFD traders can speculate on both bearish and bullish markets. So, if the forecast is a crash in the price of the underlying gold asset, CFD traders have opportunities for potential profits. If it is a soar in prices, the traders also stand a chance to make potential profits.
Flexibility and convenience
On the broker trading platforms, CFD traders can open several positions simultaneously. For example, a CFD trader who specializes in commodity trading may open positions on gold, silver, platinum and other assets at the same time, from the same account balance and on the same platform. Gold CFDs does not expire, you can choose to trade at your convenience and on any device such as computers, phablets, smart phones, etc provided that the broker platform supports it.
Disadvantages
Leverage risks
Leverage was designed to be an advantage because it can help a trader to grow his trading capital faster if the market goes in his favour. But, when the market goes against the traders’ positions, leverage multiplies the potential losses in the same proportion that it multiplies potential profits. All brokers warn their clients of the risks associated with leveraged CFD trades. This is why the brokers place warning or ‘risk disclosure’ statements conspicuously on their websites.
Market risk
Investing in Silver, gold and other CFD assets are risky because the prices of these assets keep changing very quickly when observed from brokers’ trading platforms. In times of market volatility, the assets prices move significantly upward and downward in a jiffy. This exposes traders to market risks as the market can easily reverse against their positions resulting in huge losses within a short time interval.
Fees
Investing in gold CFDs attract fees because all brokers charge fees for their services. Below are some of the fees charged by brokers:
- Ask-bid spread: Most brokers embed their trading fees into the ask-bid spread. The spread may be fixed or variable.
- Commission: Some brokers charge a fixed commission on all trades depending on the contract size. There are brokers that charge both spread and commissions depending on the account type held by the trader.
- Payment commissions: Some brokers charge commissions on deposits and withdrawals. The commissions sometimes depend on the withdrawal method used and the amount involved.
- Swap fees: This is charged from accounts that maintain open positions overnight.
- Inactivity fees: Many brokers charge this monthly fee from accounts that have not traded for a specified number of days.
Summary
Investing in gold is an age-long practice that has spanned for centuries. Gold is rare, expensive and has many physical and chemical properties. You can invest in gold by buying the physical bullion, trading gold ETFs, buying stocks of gold dependent companies, trading gold futures or options contracts as well as trading gold CFDs. With gold CFDs, you only speculate on its prices and will not own the commodity. CFDs are convenient, require less capital, flexible and offer trading opportunities but are highly risky especially because of leverage trading.
ROInvesting is an award-winning, regulated CFD broker that operates from Cyprus. We offer more than 350 CFD assets which includes gold commodity trading. ROInvesting has deployed cutting-edge technology which has ensured speedy trade executions, multiple trading tools and competitive spreads. Multiple payment options are supported and our support team is available on a 24/5 basis to attend to all clients’ challenges. Our ‘education centre’ is bursting with useful training resources in form of articles, video lessons and eBooks.
FAQs
How much do I need to start investing in gold CFDs?
There is no fixed amount required to commence trading gold CFDs. Each broker sets its own minimum account opening balance as well as the leverage for each asset. The amount required to trade one gold CFD contract depends on the leverage available to you. ROInvesting offers a leverage of 1:20 to retail investors.
For example: if the quote for one XAUUSD contract is $1,936.44, what is the minimum amount required by a retail trader to open a position on a leverage of 1:20. Amount required to open one contract = 1936.44/20 = $96.22 Note: this is just an estimate, the prices are unstable and there may be other charges involved.
Are CFDs illegal?
CFDs are legal in most parts of the world. Unfortunately, they are illegal in the United States, Belgium and a few other countries. Most regulated brokers will tell you if you are eligible for registration on their website based on your citizenship and residential address.
Is trading Gold CFD a gamble?
Gambling is a game of uncertainty where players simply rely on luck to win. If a CFD trader randomly opens a ‘buy’ or ‘sell’ position without prior market analysis, then he is gambling. But, if he is an accomplished trader with a good trading plan, rugged trading strategies, meticulous market analysis and risk management strategies; then it is no gamble.
