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Methods of trading and investing in gold

investing in gold
Gold is a soft, yellow metal that occurs freely in nature. It is found in different parts of the world. In fact, the ‘South Deep gold mine’ in South Africa has the largest gold deposits in the world. Since prehistoric times, man has always mined Gold and regarded it as a precious metal. The exact origin of Gold mining is unknown but some Gold artifacts found in Varna Necropolis, Bulgaria has been proved to be about 7,000 years. So, exploration and mining of gold started long ago.

Chemically, Gold is referred to as Aurum with the chemical symbol Au and the atomic number 79. It is a group 11 element and a transition metal that is often found in combination with other metals like silver, nickel, copper, iron, etc. Gold is malleable, ductile and a good conductor of heat and electricity. In fact, 1 ounce of gold can be stretched up to 50 miles and can also be hammered into a sheet measuring 9 square meters. In modern times; gold is used in dentistry, medicine, electronics and computers, Jewelry, etc.

The gold standard was a monetary system based on a specified quantity of gold. It was the international monetary system used from the 1870s to the 1920s. Today, fiat money is used all over the world as a legal tender but central banks still own large gold reserves; for example, the South African Reserve Bank (SARB) has maintained gold reserves since 1925. The American gold reserves are stored in Fort Knox; a guarded vault located in Kentucky, USA.

The price of gold has always been high but unstable; at the moment, an ounce of gold is more than $1,500. This is one of the reasons why it is often mixed with other metals in jewelry. The purity of gold is measured in karats. Pure Gold is 24 karats, so, a 12 karat gold jewelry has 50% gold content. Investors may buy and keep gold jewelry in order to trade later at a profit. Also, investing in physical gold can be done by buying gold coins or gold bullions.

Invest in Gold: Bullion

Bullion is the term used to refer to refined and high standard metals especially Gold or Silver. Gold bullion is usually in form of gold bars or coins. Since 1800, gold has been minted into coins; today Gold coins are minted officially for investment objectives. In South Africa, gold coins are produced by ‘Rand refinery’ and the ‘South African Mint’. The coin is called ‘Krugerrand’ and over 50 million coins have been sold since its production started in 1967.

Gold bars are made by pouring molten gold into molds or ingots of various sizes. The standard sizes held in central bank reserves are about 400 troy ounces. The Asian gold market sells 10, 100, and 1000 gram bars.

Investors can buy gold and keep it for any of the following reasons:

• To hedge against risks imposed by inflation, currency depreciation, government policies, political instability, etc.

• Diversification of investment portfolio.

• Since it is not destroyed by fire, water, or age; it can be used to store wealth that can be passed to the next generation.

• It is a convenient store of wealth; for example, gold bullion valued at $100,000 can fit into the pocket of your trousers.

• Some people use it as a means to save money; they buy physical gold and keep it till when they need cash, they put it up for sale. Gold is highly liquid; it can easily be sold anywhere in the world.

Holding physical gold is beautiful and gives a sense of happiness and satisfaction. This is why many ancient kings held physical gold, kept golden objects in their palaces, and even had their tombs decorated with gold. However, gold coins or bars can be stolen, easily hidden, and sold in a jiffy. 

Invest in Gold: Futures

These are financial contracts where investors agree to buy or sell a specified quantity of gold at a stated price on a future date. Gold Futures contracts are traded on commodity exchanges. Gold miners use gold futures to hedge against price drops while speculators may use it to make money from falling or rising gold prices. Depending on the terms and exchange involved, gold futures may be cash-settled or the seller delivers the physical gold on contract expiry. Risk is involved because you may lose part of your invested capital if the gold market price moves against you. 

Invest in Gold: Options

Options are financial contracts that give the right, not the obligation to buy or sell gold at a specified price before a future expiry date. The underlying asset may be physical gold or gold futures. The agreed price is known as the strike price. Call options give the right to buy while put options give the right to sell, but the option holder may decide not to deal especially if the price of gold has turned out to be unfavorable to him. You buy a call option when you predict a rise in gold prices and buy a put option when you predict a decline.

Gold options contracts are offered on commodity exchanges and also by over-the-counter brokers. 

Invest in Gold: ETF

Exchange-traded funds are a basket of securities that are grouped together and traded just like stocks on a stock exchange. Gold ETFs give investors an alternative way of investing in gold without owning the physical asset. It tracks the prices of the commodity giving the investors the opportunity to speculate. You can buy the shares of ETF assets in order to sell later when the price appreciates. According to etf.com, there are about 35 gold ETFs but the largest is the SPDR Gold Trust GLD with about $55.80 billion in assets. 

Invest in Gold: Stocks

You can invest in gold stocks by buying the shares of companies that are into the gold business. Gold companies may be into exploration, mining, streaming, and marketing of gold and its products. The largest gold mining company in the world is Newmont Goldcorp, USA; with a total production of 178.35 tonnes in 2020. Other top Gold mining companies are Barrick Gold, Canada; Polyus Gold, Newcrest mining, etc. Franco-Nevado is a Canadian gold royalty and streaming company whose stocks are traded on the Toronto stock exchange and the New York stock exchange. The top gold mining companies are members of the World Gold Council; which is an organization that stimulates and sustains the demand for gold.

Listed on various stock exchanges, investors can own or trade the shares of these individual gold companies. The price of gold usually correlates with gold stocks.  

Invest in Gold: Contract for differences (CFDs)

Gold CFDs are over-the-counter financial contracts that allow investors or traders to predict the price movements of gold without owning the physical gold coins or bullions. In trading gold CFDs, the trader first analyzes the current gold price and forecasts whether it will increase or decrease. If an increment is predicted, he will buy Gold on the trading platform provided by his broker; but if a decline in gold price is forecasted, then, he will sell gold on the platform. 

CFDs are majorly offered by online brokers who provide traders with a software platform where all trades are placed. The broker also provides the hardware infrastructures, the software required and drafts the contract specifications. Every broker provides a software trading platform that interfaces with the trader. On the platform, two quotes are streamed for each CFD asset; ask and bid prices. Traders will buy the assets at the ask prices and selling will be at the bid prices. 

Trading gold CFDs with InvestBy

InvestBy is a forex and CFD broker that is established in Belarus but offers its services over the internet. On its trading platforms, more than 350 CFDs can be traded. There are CFDs in commodities, stocks, indices, cryptocurrencies, and forex. The Gold CFD prices listed on the platform is derived from the actual prices of a troy ounce of gold. It is paired and traded against some popular currencies; like the US dollar (XAUUSD).

Below is an outline of how to start investing in gold CFDs with InvestBy:

• Click on ‘open account’ to display the form.

• Enter your personal details and complete the questionnaire.

• Upload a copy of your recent utility bill and a government-issued ID card.

• Transfer your trading capital into the new account using any of the payment options and wait for your account to be approved.

• Choose a trading platform; the available options are: InvestBy WebTrader, InvestBy mobile app, MT4 WebTrader, MT4 windows desktop application, MT4 android app, and MT4 iOS app.

• Login to your chosen platform; open a buying or selling position on gold CFDs. You can set ‘stop loss’, take profit, etc.

• Close the trade at your own time.

It is relatively a simple process to invest in gold via CFDs. The contract is terminated once you close the open position and your profits or losses are automatically calculated and added to your account balance. Trading CFDs pose a risk to your capital, so, financial planning is necessary. It is important to understand how it works and define your risk appetite before opening positions. 

Why should I invest in gold CFDs?

Convenient and secure

One of the reasons to invest in gold CFD instead of bullion is its simplicity. Everything is done online and all you need is a smartphone, tablet, or computer. No need to hide away anything from thieves or worry about selling at a good price. 

Multiple profit opportunities

If you buy and store gold bullions, you will lose money if the cost of gold declines. But with CFDs, you have profit potentials when gold prices are rising or falling. You only have to open a buying position when prices are increasing and open a selling position in declining markets. Either way, if your prediction is right, you make profits, but if you are wrong, losses will ensue. 

Requires less capital

Leverage is a tool used to open large CFD trade positions with less money. Generally, CFDs are traded on leverage and that includes gold CFDs. For example, on leverage of 1:20, a trader can trade gold CFDs valued at $20,000 with only a $1,000 deposit. This gives the trader greater opportunities for profits but if the trade goes against his predictions, leverage will also multiply his losses in the same proportion. 

Conclusion

Gold is a valuable, shiny metal that has been mined and used by man for several centuries. You can invest in gold by buying physical bullion, trading options and futures contracts, ETFs, and by buying stocks of gold mining and exploration companies. Also, you can trade gold CFDs which are convenient, has greater profit potentials, and are less capital intensive.

InvestBy is a CFD broker that offers its clients opportunities to invest in gold CFDs as well as hundreds of other CFD assets.

The broker has deployed cutting-edge technology leading to competitive spreads and lightning-speed trade executions. If you are a beginner, you can start with a demo account and learn from the provided ‘educational center’. Professionals and sophisticated investors are welcome to bring their trading style, robots or trading systems. 

FAQ: Gold investment in South Africa

Is keeping gold a good investment?

It depends on your personality and investment objectives. Generally, since gold does not perish and is not dependent on governments or fiat currencies, it is considered as a safe haven investments option especially for hedging against inflation. Sophisticated investors deploy various strategies which include hedging their positions with gold investments and other securities. 

What factors influence the price of Gold?

Many factors affect gold’s price, some of them are:

• Market forces of demand and supply.
• Rumors, News and events
• Central banks reserves
• Investors behavior
• Exchange rates of leading currencies especially the US dollar

What happens when you buy Gold CFDs?

You will not be buying gold bullion or owning physical gold, rather you will have the opportunity to make profits if the price of gold rises and lose if the price plummets. The difference between the entry and closing price of the gold CFD trade is used to calculate your profits or losses. The broker also charges its trading fees either by marking up the spread or through commissions.
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