Gold Trading Basics

Recently, gold has enjoyed a spectacular bull run and this has drawn in more people into gold trading and investment. Many have witnessed gold prices first resisting the $1000 per ounce level a few times and then surpassing it rather violently. Gains for well-informed gold investors have thus been quite heady and indeed gold trading can look very attractive to beginners.

This article introduces gold trading and answers the basic questions “Why invest in gold?” and “How to invest in gold?” For starters, the value of gold is reflected in its spot price and this is determined chiefly by demand and supply factors. Primarily, gold is highly valued both for its “protection” feature as well as for industrial and commercial use.

A case in point: countries like China and India are constantly in demand for gold, sometimes even hoarding it — such demands can bolster gold prices. However, when gold price goes up abruptly, these gold hoards could be traded as profitable investments.

Currencies have to deal with the concern of devaluation when too much paper money is being printed or when there are economic issues. Gold does not erode likewise in terms of its value as it is a physical asset with an inherent “stored value”. Many times, gold is viewed as a hedge against inflation.

During economic crises, investors tend to shun currencies and other riskier investments, favoring gold as the preferred “hard currency”, if you will. This is how gold got its reputation as a safe haven, something you might have read about in the newspapers or heard on TV reports.

Think about the recent Eurozone trouble where some countries are being bailed out — you probably have seen how gold prices powered up fiercely over just a few months, creating new highs and resetting them.

In fact, within a short period of 5 quarters, gold has moved above the magical $1000 per ounce level after trying to surpass it a few times. Gold price has hit as high as $1426 just a few weeks back, representing a huge 40% return for savvy investors who entered at the thousand dollar level.

Depending on your risk appetite and trading account size, there are a number of ways you can participate in the gold market, as outlined below:

** Physical gold
You can buy either bullion or gold coins if you are an investor who likes to keep physical gold. Consider owning Krugerrands, which are South African gold coins that have nice investment value. Sometimes, older coins can also reward you with good returns, but valuing them may not be easy for starters.

** Gold stocks
If physical gold is not your idea of gold investment, think about owning shares of stocks in gold mining and trading companies, or gold producers themselves. You can gain exposure to increases in the value of gold through higher stock prices. Some of the gold companies could be owning yet-to-be explored gold resources, so the potential for speculators driving up stock prices cannot be dismissed too.

** Gold exchange traded funds, or gold ETFs
Gold exchange traded funds, or ETFs, are investment products that aim to track the price of gold. They are bought and sold much like stocks, making them an easy instrument for an investor to exploit movements in gold price without the large outlay required when dealing with physical gold.

** Covered warrants
For short-term speculative trading in gold, covered warrants can be good instruments that allow you to get the exposure from both rise and fall in gold prices. Purchase calls if you have the view of rising gold prices, or purchase puts if you envision lower prices. As leverage is used here and warrants have expiry dates, this is a somewhat riskier trading approach.

** Gold futures
Much like covered warrants, gold futures also provide speculative play on gold prices. This is a market where many professionals speculate and/or hedge, rather than hold for long term. While warrants are traded through your securities account, you will need to open a futures account with a commodity broker to trade gold futures.

As commodities trading can be a riskier way of making money, do exercise caution when you contemplate gold trading. Be mindful that while large gains can be had, gold prices can plunge violently as well. Always be on the alert and limit your losses to a comfortable level so that you do not bankrupt your trading account.

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