The yellow metal, gold, is by far and away the most widely traded precious metal. It has many uses such as in jewellery production, mobile phones, medical equipment, dentistry and aerospace. It is commonly used by governments, large institutions such as hedge funds and even retail investors as a hedging tool that is useful in a number of instances including:
– During times of high Inflation
– When economic powers are experiencing unstainable government debt
– When countries are at war
– When there is social unrest
There are a number of countries that are key to gold production (see the chart below). China leads the way by some margin which is unsurprising when you consider its land mass. Australia is the second biggest producer followed by the USA, Russia, and South Africa.
How can I trade gold?
There are a number of financial derivative instruments that can be used to speculate on price movement of gold and of course purchasing the precious metal outright might be preferential for some. We will discuss each of the most popular options in turn.
Although spread betting isn’t legal in all countries, if you reside In a jurisdiction where it is permitted, you will find it to be one of the most cost effective instruments for trading gold.
The innovator of spread betting, IG Index, began by catering to the ever increasing demand for gold investment in 1974. It now provides access to over ten thousand markets although gold is definitely it’s speciality and this is apparent when you view its dealing costs (just half a point) for the precious metal.
The cost effectiveness is especially true in the United Kingdom where any gains made from trades are not tax deductible.
You might think that a forex account would be used to simply speculate on movements of currency pairs. Many brokers however, allow you to trade on other markets such as gold. Easy-Forex is our preferred provider and is certainly worth considering, especially if you are also keen to get involved in the forex markets.
Binaries aren’t necessarily the most cost effective way to trade the gold price, although they are certainly one of the simplest.
Binary options have grown in popularity significantly over the last few years mainly due to their ease of use.
To place a binary trade, simply choose how much money you want to trade, decide on which way you think the price of gold is going to move and the time frame you wish to trade over. If you were correct with your prediction then you will receive a profit that would have been fixed at the time of opening the trade. If the market moved in the other direction, then you lose the figure you traded with.
This type of options allows the holder the option to purchase a predetermined volume of gold at an agreed price. Because, you have the ‘option’, it is acceptable to refrain from making the purchase if the spot price when the option expires is less than what it was when you bought the option.
EFTs or Exchange Traded Funds are exchange listed funds that can be traded in a very similar way to stock. EFTs are a relatively low cost way to speculate on gold prices and can benefit from tax efficiencies.
If you like a more traditional approach to gold trading, it is possible to physically purchase the yellow metal. There is no better feeling than having a stack of gold sitting in your safe although there are considerable downsides to this option.
First of all, you stand the risk of having the gold stolen. Also, if you want to invest considerable sums of money into gold then you are going to need to either rent space in a bank vault or purchase a high quality safe to keep in your home. Any gain made when it comes to selling it could be taxable and you may also be charged VAT (depending upon where you live) when purchasing it. These are added expenses that can be avoided. If maximising the return from your investment is the main consideration for you then physically purchasing gold probably isn’t the best option for you.