Business

How Does Gold Trading Work?

If the word gold trading brings the idea of trading goods from one country to another in your mind, then you’re totally in the wrong place.

Before you set up a trading account, you need to know what gold trading really is and how it actually works.

Jumping right into it will definitely drag you into a mess without getting you any fruitful outcome.

How Does Gold Trading Work? 

Before you get into the respective field, knowing what options you, as an investor, have makes it easier to have a good start.

  • Gold Bullion 

It is basically gold in the physical form, often in bars or coins. The value of these bars or coins depends on the type of bullion and weight per unit. While this type of gold is easier to keep, it has its insurance and storage costs to consider.

  • Gold Futures 

There are contracts called gold futures or micro futures where a fixed price is agreed upon which will be accommodated in the future on the specified date. Although outcomes from gold futures contracts are dependent on price fluctuations during the time the contract has taken place up to the time of accommodation.

  • Gold Exchange-Traded Funds 

Bought from a broker or stock exchange, gold etf enables you to have objects or commodities like having all assets that an individual need without actually buying them. The value of an ETF is dependent on the current price of gold.

Above are the three main options that an investor should know about. There are others like Gold CDFs where a fixed amount of gold is bought or sold in terms of short-term orders or gold certificates which is similar to cash banknotes.

Although Gold trading is not a confusing investment and has a lot of benefits but with advantages comes risk. Risks that every investor should have in mind before proceeding with gold trading.

Risks Involved in Gold Trading 

The price of Gold depends on supply and demand where the value keeps fluctuating. As a result, if the price of gold goes down, you will be at a loss. As an investor, you should be aware of the current ongoing price fluctuation in gold before purchasing it.

The other fact that affects the value of gold is a new discovery. The price of gold majorly drops down if there’s an inflow of new supply. But we suggest you keep an eye on the seasons where the gold prices go high for example, in India, during wedding seasons, gold is highly demanded thus its value spikes up.

We know how tempting it is to start gold trading when the value is going up during an economic crisis. But keep in mind that if its value goes up when the conditions are worse, it will go down once the economy is restored or improved. The value of gold in 2011 dropped down half of the amount by 2016 and is yet to come up to the level it was in 2011.

To sum it up, gold has the following risk when it comes to gold trading or investing,

  • Volatility

Be it dollars, euros, pounds, or even in rupees, the currency you measure it against does not matter. The hard and fast rule you should learn and be open to is that the relative value of gold is always going to be varied.

  • Manipulation 

The above-mentioned gold future Contracts aren’t all that safe as they seem to be. Traders in the past have attempted and have been successful in manipulating the price. In 2014 a major scandal of price-fixing took place where known banks were involved in manipulating the trading.

  • Liquidity 

Liquidity is basically a question of how easily and effortlessly will you be able to get your hands on gold and sell it out openly at a recognized value in the market. And with gold, you might realize that whether it is safe in the vault or a bank, it takes time for you to really have it before you decide to sell it off.

  • Thievery Risks 

With every investment and trading comes the risk of theft. While it is so common, it is even expected to happen often with gold. If you possess gold in a physical form, it could be stolen or if you have a stable coin that actually represents all your gold stored, there are chances that it all may turn out to be nothing but shining glitter.

While gold is not easily destructible, there are chances that it may all be melted if there’s fire. In such situations, you will have to invest some more for further refinement.

Let’s not get into the risks of storing and the hassle you, as a gold trader will have to go through while gold trading.

Bottom Line

The point is that with trading and investments there is always a long never-ending list of possible risks involved. But what lowers the chances of those risks happening are the strategies that you understand and execute while gold trading.

Learning what factors impact buying, selling, inflation and deflation is essential. Understanding the ups and downs and possibilities of several risks happening and having planned out strategies to overcome the damage those risks bring will lend you to the category of the best gold trader.

Keep your focus and an eye out for risks and you are good to go for gold trading!

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