The How And Why Of Trading Gold

Interested in trading metal futures? Click here to check out Plus500!

Gold has rallied significantly in 2024 thus far, as the macroeconomic backdrop and geopolitical landscape have compelled investors to seek safety in this asset class. Gold’s primary value proposition is its ability to protect against inflation, be a source of diversification and buffer against uncertainty. Though inflation in many global economies has been greatly reduced, the demand for gold is still top of mind for many due to the fact that much uncertainty still remains in the broader socio-economic environment.

While the investment themes of artificial intelligence and semiconductors have been prevalent for investors recently, this has also raised concerns among some around market concentration in big tech names. Given the low correlation of gold to other asset classes, exposure to this asset class could seem attractive at this point, given its diversification capabilities within a portfolio. There are also geopolitical development considerations, such as war, that have been supportive of assets such as gold.

Gold’s perceived safe-haven qualities may make it an ideal asset class to invest in regardless of the current economic cycle. Apart from being seen as a safe haven in uncertain times, gold also has industrial uses in electronic goods, which further diversifies its demand. The precious metal is usually priced in U.S. dollars.

In the current environment, Goldman Sachs Research analyst Lina Thomas expects its price to rise to $3,000 per troy ounce by end-2025.

Central Banks And Their Influence On Gold

As mentioned previously, with inflation in many global economies coming down, central banks in these regions have begun to materially reduce interest rates. Most notably in September 2024, the U.S. Federal Reserve made a 50-basis point cut, with the market anticipating further cuts in the future. Given that gold is a non-yielding asset, the reduction in interest rates will impact interest-bearing instruments adversely; as such, it's possible investors may begin re-orienting their portfolio including toward gold, further driving price increases.

While the change in interest rate may have a tangential impact on gold prices, the direct actions of central banks are also influencing gold prices. As noted in research by Goldman Sachs, the central banks of the U.S., France, Germany and Italy have gold holdings making up 70% of their reserves. However, since the freezing of Russian central bank assets in 2022, emerging market central banks’ gold purchases have also risen in an effort to diversify their reserve holdings (i.e., de-dollarization). As noted in the report, China, for example, reports having just 5% of its reserves in the metal. With some central banks in emerging markets attempting to catch up to their counterparts in developed countries, the demand for gold by these institutions could be long-tenured. As such, some anticipate buying pressure that will keep prices high.

Engaging In Gold Trading

While some investors may choose to invest in physical gold, others may trade it, utilizing investment instruments such as futures, options, spot prices and/or exchange-traded funds to gain exposure to the asset class.

Trading aims to generate sizable returns based on an opportunistic event or perceived mispricing of an asset that one can capitalize on. As such, it eschews the traditional buy-and-hold approach of investing, allowing investors to make advantageous long or short positions with the aim of generating a profit in a relatively short time frame. It is important to note, though, that due to the risks and volatility, one might end up losing their entire capital.

Among the previously mentioned instruments, gold futures are a popular way to trade the asset. Gold futures are a legal contract between a buyer and seller to exchange and take delivery of a specific amount of gold at a predetermined price and date. One of the primary attractions of gold futures for traders is the ability to speculate on the price of gold. As a legal contract, it has an end date, however, traders normally do not take ownership of the gold, as the contract enables them to engage with price fluctuations before the contract’s expiration date.

Using futures allows traders to access the asset at a lower price, benefit from greater market liquidity (i.e. given that they trade on an exchange) and utilize leverage as a means of amplifying their returns. However, use of leverage comes with the potential of losses greater than one's principal investment, should market movements go counter to one's trade.

 Another way in which traders can gain exposure to gold is through options, the derivative instrument that provides the right – but not the obligation – to transact at a predetermined price. Gold options are options contracts that utilize either physical gold or gold futures as their underlying instrument. As such, call options on gold give the contract holder the right to buy the metal at a pre-set price before it expires, and put options provide the right to sell.

Using options in trading gold allows traders to deploy smaller capital, but due to the nature of options contracts, they can still maintain exposure to a large quantity of the asset. By using less capital to achieve an outsized exposure to gold’s price movements, options can lead to higher returns/losses on capital compared to a direct investment in gold.

Spot gold purchasing and selling is also an option for traders, allowing them to trade the asset in the moment – no contracts involved. Doing this is relatively simple but does mean that traders are exposed to market fluctuations.

Finally, exchange-traded funds offer another avenue for traders, enabling them to gain comprehensive or specific industry exposure to companies that are stakeholders in the gold value chain. Having such exposure in a turnkey manner does allow for greater ease in trading in or out of the industry, if a material event does occur. 

Why Consider Gold Now?

There is much uncertainty within the global landscape at this juncture, as such, gold allows investors to mitigate their risk exposure. Given the asset class's traditional use as a store of value, due to its finite nature, gold is broadly accepted as a means of transaction in the absence of traditional currency. Finally, as a means of diversifying one's portfolio, gold is proven to be an additive and generally complementary component.

How To Trade Gold With Plus500

Plus500 PLSQF is a multi-asset fintech group operating trading platforms globally. Established in 2008, the firm has grown its importance within the financial trading sector, being listed on the London Stock Exchange under the ticker symbol PLUS and included in the FTSE 250 Index.

Given the firm's global operations, it is regulated by several entities, including the UK’s Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC), the Israel Securities Authority (ISA) and others across Europe and Asia-Pacific jurisdictions.

Regarding service offerings, Plus500 is expanding and currently offers three platforms: Plus500 Contract For Differences (CFD) with more than 2800 CFD instruments, Plus500 Invest with more than 2700 shares (available in certain countries) and Plus500 Futures, which is a futures platform available in the U.S. only.

As a trading platform, Plus500 is designed to be straightforward and accessible for beginners while offering advanced features for experienced traders. Traders can start with as little as $100. Plus500 Futures (U.S.) offers a deposit bonus of up to $200.

For traders interested in gold and other commodity CFDs, Plus 500 can provide up to 1:20 leverage on such transactions. Plus 500 also provides educational resources that can be utilized to upskill one's trading ability, with ongoing 24/7 professional support as needed.

Ready to begin your gold trading journey? Click here to check out the Plus500 platform!  

Trading with leverage comes with a high risk and may not be suitable for everyone.

Featured photo by Zlaťáky.cz on Unsplash.

This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.