The London gold market, one of the oldest, is the largest for physical gold. Since 1919, the London gold fix has been the international gold price standard. The major gold futures exchange for Americans who trade in the gold market is the New York Mercantile Exchange Commodity Exchange Division, which began trading gold futures in 1974 after a ban of more than 40 years. Other important gold markets are in Dubai, Hong Kong, Shanghai, Singapore, Sydney, Tokyo, and Zurich. At any time day or night a market somewhere sets the price of gold.
Prices for physical commodities respond to mostly supply and demand, but trade in the gold market is exceptional in its additional responsiveness to public moods, particularly fear, anxiety, and apprehension. Gold prices typically rise in times of crises and emergencies. A natural disaster, stock market crash, terrorist attack, or outbreak of war can cause a buying frenzy by those who trade in the gold market and see it as safer than and for that reason preferable to paper assets.
Gold prices usually rise in times of high inflation, which usually causes interest rates to rise. Gold future prices also relate inversely to the value of the US dollar because all commodity prices are in dollars. When the dollar declines in value, the price of gold in dollars necessarily goes up. Many news events reported by the financial press also affect the price of gold.
Gold market investment vehicles are physical gold itself in the forms of bullion and coins, gold futures and options, stocks in manufacturers of gold merchandise and in mining businesses, and gold exchange-traded funds. Most financial experts say every portfolio should have some physical gold, which, however, is not the most desirable trading vehicle. Initial margin requirements on a 100-ounce contract may exceed $10,000, and such contracts can be extremely risky. A one-day $51.30/ ounce decline in the price of an April 2014 gold future lost traders on the wrong side of the transaction $5,130 each.
Specialist services buy physical gold and store it for investors. But the disadvantages in physical gold are that it is difficult to sell quickly and storage costs can be high.
For trading purposes, substitutes for physical gold futures require and risk substantially less cash. There are over two dozen exchange-traded funds (ETFs) on the gold market secured by physical gold, portfolios of future and option positions, and gold and mining stocks, some that reflect the fluctuations in price movements of the metal itself, some that produce price changes two to three times the price of physical gold, and others, inverse funds, that move in opposite directions.
The largest, most traded, and most accurate actual gold price-tracking ETFs are The SPDR Gold Trust (GLD), largest of the gold ETFs with an average daily trading volume of more than 150,000 shares, and the iShares Gold Trust (IAU), the second largest with a volume of 100,000 shares. Shares of both GLD and IAU trade like those of any other ETF or common stock. With both funds, losses would be proportionately smaller than in a physical gold futures trade, an important safeguard in mercurial markets. Of course, gains also would be proportionately smaller, but return percentages would be roughly similar or even larger in trades on margin.
Gold commodity ETFs allow investors to enter the gold market without actually owning any gold. Some gold ETFs consist of futures and derivative contracts that track the price of gold, others of gold assets held by the trust. The investor in GLD or IAU shares does not own the gold assets held by the trust, which issues baskets redeemable by gold deposits.
Gold ETFs are attractive to investors for their favorable taxation treatment create. Capital gains taxes deferred until their sale make ETFs more desirable than are mutual funds and other investments for that reason.
Another nice feature about gold ETFs is simplicity. To invest in gold mining requires purchases of gold mining stocks, and even investments in the XAU requires purchase of all equities in the index basket to fix a certain price. Complications and commissions make investing goals hard to reach. In a gold ETF investment, there is one purchase at one price and savings on avoided commissions.
An indirect way to trade in the gold market is to invest in mining and metal production. Share prices of mining company stocks have fallen on recent markets, making them attractive investments in comparison to the steadily rising gold prices. Investors should keep in mind, however, that any broad sell-off in equities may affect shares in mining companies adversely, events against which gold holdings can protect them.
How to Trade Gold Online
The Price of gold is constantly on the move. Take advantage of the daily price changes in gold with an online trading account. Some brokers offer bonuses of up to 30% on your first deposit (Terms and conditions apply). Open Gold Trading Account Here
The broker trading platform will also provide you with numerous charting tools and the ability to trade other commodities and currencies in addition to gold CFD’s. You might also want to begin trading with a demo account before attempting to risk any of your own money. That way you can practice trading with virtual money on the demo platform first.