Why and how to trade the gold

There has always been a fascination with gold since the beginning of the first great civilizations, and that fascination continues to this day. Is it worth investing in gold these days? There is no doubt that this precious metal should be a part of the portfolio of every experienced investor, but what exactly is the truth about the fact that it should not be missed out? When it comes to investing in gold, there are multiple ways to go about it if you decide to do so. Which one do you think you should choose? You will find out all this within the next 10 minutes.

A brief history of gold

Our ancestors were involved in the first economic interactions that were based on gold, as with salt at the beginning of the era. As history progressed and the first civilizations started to emerge, gold became a currency that was widely accepted by everyone (like silver, for example) as history moved forward. And it was quite so until recently. In 1944, the Bretton Woods international monetary system was set up by the United States and the United Kingdom as a mechanism to establish gold as a currency, convertible into dollars.

As a result, the US dollar was elevated to the status of the world's reserve currency, and its convertibility into gold was assured. According to the fixed exchange rate, the price of an ounce of gold was set at $35 per troy ounce. This means, in practice, that the central banks would be able to exchange their own currency for the dollar with the US Federal Reserve (US Federal Reserve) in exchange for gold in exchange for the dollar.

As the Bretton Woods system became more and more flawed over the years, it was eventually abandoned in 1971. As a matter of fact, this moment is regarded as a historical milestone since gold has lost its utility as a means of currency, which it has held for several thousand years. As a result, today, there is no explicit link between the value of any of the world's currencies and the value of this precious metal. So what is the reason for investing in gold?

Do you know why gold is traded?

Due to the fact that gold preserves its value

There are limited gold reserves, and neither alchemists nor scientists have (yet) invented a philosopher's stone to produce gold, the price of this glittering metal tends to rise. In addition, new deposits are not discovered too frequently, and when they do, extraction proves to be economically disadvantageous. Furthermore, the slower the increase in gold reserves around the world is, the more likely it is that its price will increase in the future. The idea of investing part of your free capital and purchasing a certain amount of gold may be a good way to (not only) preserve the value of that capital for the future.

Because gold is a "safe haven"

Generally, the term "safe haven" refers to assets that have the ability to withstand market disruptions that have been caused by economic, political, or other crises that have disrupted the economy. In spite of the fact that some world currencies or stocks tend to decline in value during these times, gold tends to behave in quite the opposite way. There are also other reasons why gold is viewed as a safe haven by investors, which is why at a time when the markets are in turmoil and the arrival of a turbulent period can be felt, investors are pouring their capital into gold to protect their investment. As a result, its price continues to rise.

Because gold protects against inflation

Depending on how well a person understands his or her financial literacy, it is also important to consider how they preserve their savings value. As a result, while some people hold their savings in a cup on the shelf, where it is easily accessible to thieves (and inflation), others have invested in gold to protect themselves from the devaluation of their savings in the future.

It has already been mentioned that the value of gold tends to increase slowly but surely over time. In spite of occasional value drops, the company continues to grow. Taking the case of currencies, which are often torn apart by inflation spasms, for example, this cannot be said.

Because gold is a suitable means of diversifying the investment portfolio

Almost every experienced investor will agree that the invested capital needs to be distributed in such a way that the risk of its loss is kept to a minimum as possible.

As a result, part of the money goes into assets that tend to grow in economic times (such as stocks), while the other part goes into assets that behave exactly the opposite way. Gold, for example, tends to rise in price when share prices fall, as does real estate, securities, and other such investments. A properly balanced portfolio must include gold investments.

How to trade the gold

Futures contracts

Gold futures contracts allow you to purchase a future supply of this precious metal in its physical form. However, this doesn't mean that you have to install a vault in order to store all of the bricks that you have collected. As part of each contract, a predetermined date has been set for when the delivery of gold in its physical form is to take place. It is called the expiration date. As a result, if you are able to get rid of the contract and sell it before the expiration date, you will not need a vault if you manage to do so.

We would rather not recommend this method of gold trading online if you are not interested in speculating on gold prices in the short term. Instead, if you prefer to invest in gold in the long run, we would rather not recommend this method of gold trading online in UAE.

Purchase of gold in physical form

Who wouldn't want to own a nugget or brick of gold? As a result of it, you are able to keep an eye on your investment and keep it under control at all times. However, it's not as easy as it sounds. In the case that you want to trade gold in the way where you come to the dealer, give him a certain amount of money, and then take the precious metal away, there is never any guarantee that you will not fall into the hands of fraudsters. It is often almost impossible to distinguish between real gold and false gold unless you are an expert in the field.

Buying gold for a spot price

Second, you can purchase gold at a spot price, which involves buying a contract for a certain amount of stored gold. Buying gold at a spot price has its pros and cons, just like any other way of trading gold. 

As a partial advantage, you have the possibility of utilizing financial leverage, which is a mechanism that will allow you to trade with estimates that are many times the amount of your initial investment. It is partly because higher profits can be accompanied by higher losses as well. The disadvantage is that you will have to pay interest for the storage of the gold that you have acquired, which will result in expenses for the investment, especially if you plan to hold it for a long period of time.

Speculation on the price of gold with CFD contracts

Gold Trading through so-called contracts for difference has become one of the most popular methods of trading. In general, these are speculative papers, which are artificially created by the broker. The price of these speculative papers is usually determined by the price of futures contracts or by the spot price of gold. As a result, the trader does not directly own gold, he simply speculates on its price (the instrument designed for this purpose is called XAUUSD, which is, therefore, a relation between the price of gold and the US dollar). It should be noted, however, that the advantage of CFD contracts is that, in addition to speculation on growth, it is also possible to speculate on a decrease. Therefore, it is possible to profit in both directions in the case of CFD contracts. Basically, this means that no matter whether the gold market is thriving and the price of gold rises, or if it is in decline, the trader has the opportunity to profit regardless of which way it goes. When it comes to this case, it is extremely important to correctly estimate the direction in which the price of gold will develop in the future. There are a number of reasons why CFDs are becoming increasingly popular as a form of the gold trading company in Dubai among investors, one of which is their ability to use financial leverage to trade larger amounts than what was originally speculated on.

This means that differential contracts are similar to futures contracts in the sense that they can be used for speculation. However, there is one important difference between the differential contract and the futures contract - the differential contract cannot expire. As these contracts are created artificially by the broker, it is recommended that you place your bet with a quality broker with transparent gold trading business conditions and a good reputation among other traders since these contracts are created artificially by the broker.

Advantages of CFD contracts:

• For differential contracts, you can trade with much less capital (as opposed to the previous methods of gold trading in online platforms, where you need capital in the order of hundreds of thousands of euros, for differential contracts, thousands to tens of thousands of euros will suffice).
• A trade's leverage (refers to the ratio between the amount of capital you put into it and the number of funds you receive from your broker) determines how much you can profit and how much you can lose. In isa bullion Trading, we offer 1:20 leverage for gold trading - meaning that you can open a trading position of $ 2,000 for $ 100. This means both profit and loss. In order to maximize the return on your investment, it is essential to use the leverage wisely.).
• The ability to speculate on the rise and fall of prices of gold through CFD contracts - With CFD contracts, you are not the owner of gold; this means that you needn't worry about the fall in prices of this precious metal. In fact, you can even take advantage of it by earning a profit when the price of gold rises. 

ETF

ETF portfolios are a kind of set of shares or bonds of companies in which the investor invests at once. Their composition always follows a certain concept. In the case of gold, the ETF portfolio will contain shares or bonds of companies that mine or process gold as part of their earnings. This is a method of investing in gold that is passive and long-term with the possibility of receiving dividends in the future.

What affects the price of gold

1. When interest rates drop and having your cash deposited with the bank becomes advantageous, investors look for other means of leveraging their capital. it is precisely the gold that can offer what they are looking for. And so they reach for it which then increases the demand and thus gold’s price. Conversely, if central banks (especially the Fed) raise rates, the price of gold falls.

1. As we mentioned at the beginning of this article, there is well-established historical ties between the US dollar and gold that have come into play over time. Additionally, it implies that there is a relationship between the prices of the two entities, which can be simply described as inversely proportional between them. For instance, the price of gold rises along with the falling price of the dollar. This rule, however, is not universal, so you should consider the dollar price as one of several factors when trading gold online.

1. Oil prices - Oil prices are often influenced by geopolitical developments and overall market uncertainty. During times of crisis or war, we can also expect to see an increase in the price of oil during these times. This uncertainty is also reflected in the price of gold, precisely because investors are looking for the safe haven they will get with gold in the form of a "safe haven" for their capital, as we have already mentioned. Hence, it can be said that when oil prices rise, it is likely that the price of gold will also rise, so most of the time gold prices will also rise when oil prices rise. It may also be because oil prices are tied to the dollar and if oil prices rise, inflation will rise as well, again leading investors to look for more appropriate investments. And that is exactly the investment in gold

1. Stock market anxiety - Stock market anxiety can be caused by wars, economic crises, as well as periods of political transition (election of the US President, Brexit, etc.) as well as by periods of uncertainty affecting the economy. Then mA change in investor behavior manifests itself in trading gold as a “safe haven”.

1. Demand for gold - In addition to jewelry, gold is also used in electronics, medicine, and aviation. However, in addition to the demand from these sectors, the development of the price of gold also depends on the official government purchases that support the price of gold in the long run. Central banks buy and sell gold in order to regulate their reserves and stabilize their currency's value. This is a good time to mention that at this point it is worth pointing out that the volume of gold purchased in this way at the moment is at its highest level in the past 50 years. Where there is a constant demand, a slight increase in the price is also likely to occur where there is a constant supply.

How to choose a broker suitable for gold trading

The first step you should take before online trading gold is to choose a good online trader. Besides buying gold physically, you will need an intermediary between you and the market for all types of trading CFDs, ETFs, and Futures, and buying at a spot price.

1. Trading conditions -If you plan to actively trade/speculate, you will need excellent trading conditions. The execution speed (the time it takes your trade order to reach the broker's server and then to the market) should be of particular interest to you. It is expressed in milliseconds (the closer this metric is to zero, the better) and spread prices (the difference between the bid and ask prices, again, the lower, the better). Purple Trading is dedicated to providing the highest level of transparency possible, so you can view statistics regarding execution speed and spread prices (gold is represented by the symbol XAUUSD in the CFD column). The company falls under the Cypriot regulator CySEC, which is further controlled by the European Securities and Markets Authority ESMA. In compliance with EU regulations, our clients are also protected against negative balances to the maximum extent possible.
2. Broker License - Brokers based in the EU are generally required to demonstrate more transparency due to regulations protecting clients. By contrast, the so-called offshore brokers are able to offer higher leverage (up to 1: 400) and frequently charge a lower fees. However, the client/trader is not as protected as with EU brokers. For instance, the protection against negative balances, which prevents you from losing money on your trading account if you go into the red, is an obligation of EU brokers, but not of offshore brokers.  Accordingly, Purple Trading is regulated by the Cypriot regulator CySEC, which is further regulated by the European Securities and Markets Authority ESMA. In order to ensure that our clients are protected as much as possible under EU regulations, they can also rely on negative balance protection in accordance with these regulations.
3. STP vs MM model - How brokerage firms process their clients' trading orders can be classified into several categories according to theses. One of the most basic divisions of the market is STP (Straight Through Processing) and MM (Market Maker. The STP broker acts as an intermediary between the client and the market, thus matching his order with the counterparty and executing it. Then there is MM, which settles all its clients' orders directly with itself and thus artificially creates the counterparty. It basically means that in the event that a client fails to make money, the MM broker earns a profit as well as vice. This can create space for manipulating client orders, which is also proven by several cases from the past. Despite this, this is not the case with Purple Trading, which operates on the basis of a Straight Through Processing model. As a result, we have no conflict of interest, because we thrive only when our clients thrive as well.