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How To Trade Gold

As a rare earth metal that doesn’t rust, gold is a rare commodity that holds an intrinsic value. Gold carries an intrinsic value regardless of the market, location or time. The truth about gold is that it provides your portfolio with a risk mitigation strategy in case the markets go sideways. In other words, what we’re currently experiencing now. I hope I got your attention today as my main talking point is how to trade gold

5 Minute Takeaway

  • Gold has been money longer than any currency in history. 
  • Physical gold is the best long-term store of value
  • You can use gold as a hedge against inflation
  •  When the dollar value drops, the price of gold soars. 
  • Next to the S&P 500, gold is the second most liquid asset, according to the World Gold Council. 
  • There are many different types of gold you can trade in, from futures and coins to ETFs that own gold.

Having Gold In Your Portfolio Mitigates Your Risk

How? For starters, gold has an inverse relationship with the dollar. That means that when the dollar value drops, the price of gold soars. So, essentially, you can use gold as a hedge against inflation. 

What Is Gold Trading?

Like all of us who trade, we speculate on prices in hopes of making a profit. As far as gold is concerned, it’s no different. We have many options to speculate on price, from futures to exchange-traded funds (ETS), options to spot prices or shares. As far as physical gold bars or coins are concerned, they’re not handled during the transaction but settled in cash.

Good To Know

 Bullion refers to the physical metal itself, and investment in ETFs, Gold mining stocks and other assets that don’t require physical delivery is not actually investment in Bullion.

Why Trade Gold?

There are several reasons why you might decide to trade gold. First, gold has been a store of value for at least 3,000 years, while one of the longest currencies in history, the British Pound, is about 1,200 years old. Whether it’s for pure speculation, the desire to own physical gold, or as a hedge against inflation, the list is long. Gold tends to go up when other investments decline, providing a stabilizing effect for your portfolio.

Bullion Banks

 To put it in terms everyone can understand, bullion banking is the trading of precious metals as commodities. Bullion is incredibly expensive to store and insure because of its rarity and weight. 

Did you know that Central Banks stores most of the Gold bullion? Shockingly, with over 8,000 metric tons, the US is the world’s largest holder of gold. The large bars are kept under lock and key in the bank’s vaults.

What Is The Price Of Gold?

Before asking who sets the price of gold, you must understand which price you mean. Prices to buy and sell gold are set in one of three ways:

The Spot Price: Typically, when you buy and sell gold bullion, the price is agreed on the gold commodity spot price. This is a theoretical price for a set weight of gold before being refined and fluctuates according to supply, demand, and currency strength. Under a spot price contract, the price is set by the market at the time of purchase.

The Fixed Price: For larger orders, this is where Fixed Price comes into play. The fixed price is an average gold price close to the spot price. Its purpose is to counter the minute-by-minute fluctuations in price. Likewise, each price is derived by testing and adjusting an initial price. Moreover, it’s set by the likes of the LBMA or Comex, twice daily, at 11 am and 3 pm UK time. More on this below.

The Futures Contract Price: This option is future purchasing; a customer and a supplier agree to a set price of gold for a specified weight, delivered at a set time.

Unlike a traditional consumer product, it’s not as simple as a manufacturer and retailer deciding the price of gold. This makes it difficult to know who sets the price of gold, so below, I’ve tried to simplify matters…

Who Sets The Price Of Gold?

Gold prices are set by what’s known as “The London Gold Fix.” Five members of The London Gold Market Fixing Ltd. meet twice each business day to determine gold trading prices. You’re likely familiar with their other term known as “benchmarks.” I imagine an old boys club sitting around drinking bourbon and smoking cigars. Each of the five bankers represents one of London’s five biggest bullion banks. These five banks are HSBC, JP Morgan, Scotiabank, UBS, and ICBC Standard. The prices established by these bankers help determine gold prices internationally. 

How To Trade Gold

Gold is a fantastic commodity asset to trade and one of the best to start trading with. Additionally, whether you want to invest in gold for the long haul or actively trade it, you’ve got many choices. Each option has its pros and cons, depending on what you’re looking for. 

Below are the different types of gold you can trade in:

Gold Bullion

Bullion refers to investment-grade metal, not just an object made out of gold like the ring you wear on your finger. One of the most popular ways to invest in gold is to own physical bars of it. Also known as Gold Bullion, it’s essentially the highest-purity physical gold, usually in the form of ingots or bars. However, we have other forms of Bullion like “bullion coins.” When an investor buys bars of gold, they range in size from a few grams to over 400 ounces. 

Gold Jewelry

 Who doesn’t love gold jewelry? This popular choice offers multiple benefits: something classy to wear, a source of appreciation and the ability to be covered by most homeowner insurance policies. However, as mentioned above, jewelry does not typically count as investment-grade metal like bullion bars. 

Gold Futures

 For investors looking to step into the gold market, there are several ways to invest in this precious metal. One common strategy is through gold futures. Gold futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery from the seller a specific quantity of gold at a predetermined price on a future delivery date. Like other futures contracts, they allow investors to profit from future changes in the price of gold.  

Some investors also purchase gold futures contracts because they view gold as a reliable store of value.

Unlike an options contract, a futures contract requires both parties to follow through with the transaction, even if unprofitable. Gold futures are offered in 100 ounces, 33.2 ounces and 10 ounces and are an alternative to bullion coins and mining stocks.

Mutual Funds And ETFs That Own Gold

These funds take away the headache of owning physical gold. Some Gold ETFs invest only in companies in the gold mining industry. While some gold ETFs focus on tracking the prices of gold. The SPDR Gold MiniShares Trust fund is the best-performing gold ETF based on performance over the past year.

Gold Coins

The most common means of buying gold directly is in bullion gold coins. Coins are often collectibles with values not always aligned with gold prices. Most gold coins weigh one or two ounces, but some are smaller.

Mining Stocks

Owning shares in companies that produce gold. Value can rise with the increase in the price of gold and if the miner can increase production.

7 Of The Best Gold Mutual Funds of 2022

  1. Goldman Sachs Physical Gold ETF
  2. VanEck Merk Gold Trust
  3. FT Cboe Vest Gold Strategy Target Income ETF
  4. iShares Gold (trust) Strategy ETF
  5. wShares Enhanced Gold ETF
  6. FT Cboe Vest Gold Strategy Quarterly Buffer ETF
  7. SPDR Gold Shares

Final Thoughts

Gold really is the king of all commodities. If you understand how to trade gold, then you will understand all other bullion.



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