Due to its luster and malleability, Gold has been long valued by mankind as a source of investment. It has been a “safe haven” asset for ages too, we even discussed earlier today the feasibility of it being replaced by Cryptocurrencies. Irrespective of market conditions, gold seems to offer consistently high liquidity and profit opportunities.
CFDs are a way to trade gold allowing traders to diversify their portfolio. Without actually owning the physical asset, one may benefit from its inherent characteristics.
Factors that Affect Gold Price Movements
Before you take the plunge and start to trade gold, you need to know the factors that affect the price trends of this precious asset. Gold is priced in US dollars, and they are mostly inversely co-related. This means that when the dollar appreciates, the price of gold declines and vice versa. This is just one of the factors that affects price movements.
Gold, unlike other commonly traded assets, is not dependent on a country’s macroeconomics or its companies and infrastructure. It also has limited industrial use. So, the behaviour and sentiment of traders drives the demand and supply of this asset.
The real interest rates or the interest rate excluding inflation affects trader sentiment hugely. When interest rates are low, other investment opportunities, such as currencies, stocks or bonds, offer lower returns, which pushes investors towards alternative sources of wealth, and so they trade gold as an example. In times like these, when the demand for gold is high, exposure to gold CFDs may help investors gain short-term profits by capitalising on incremental price ticks.
Similarly, when markets are bullish, traders find less appeal in holding gold, which has otherwise less industrial use.
Trading Gold with CFDs
A gold CFD is an order to buy or sell a certain amount of gold, which you will not physically own. The profit or loss on the CFD is determined by changes in gold prices. Contracts for Difference usually cost a fraction of the amount needed to buy gold. The benefits of lesser costs in leveraging transaction sizes allows traders to take larger positions than what they can afford, increasing the chances of higher profits, although of course also increasing risk.
Depending on your trading strategy, there are different kinds of CFDs available. When you decide to trade gold you could opt for a CFD on the spot price, or take one based on future price. They come in standard sizes of contracts, such as 10 ounces or 100 ounces or mini contracts at 1/10th of the standard size.
As little as 3% of the actual value might be the amount you will need to buy the contract. Interest will be charged every day you hold the CFD. This cost of financing has to be evaluated against your margin requirements. Depending on your margin requirements, trading gold via CFDs can be very tightly leveraged. Small price ticks could provide heavy returns.
You should keep an eye on uncertainties in the forex or stock markets, which push investors towards buying gold reserves. Gold CFDs can also be traded on statistical data to determine recent highs and lows in price. Remember, gold tends to trade in cycles, and analysing or tracking these cycles could give the right signals for a position when you trade gold in the markets.
It is also important to remember that if your predictions don’t pan out, you stand to lose. So, just like in all other types of trading in various asset classes, here too, you should first assess the risks and your risk appetite when you begin to trade gold. Only then should you enter into a trade once you know you have managed the risks.