Gold has, for centuries, been considered a safe-haven for investors, largely immune from external economic factors because of its significant scarcity and high levels of demand. When markets start to wobble, either as a result of recession or uncertainty, investors of all shapes and sizes turn straight to gold and other precious metals as a means of preserving the value of their investments and perhaps even to speculate on gold pricing in the hope that other investors will similar throw their weight behind gold. Unfortunately, for a variety of reasons, trading directly in gold is not the most efficient or cost-effective way in which to speculate directly on gold prices – that’s where contracts for difference come in handy.
Why Trade Gold CFDs?
From a purely practical level, trading CFDs in gold rather than trading physical gold comes with a number of significant benefits that make for an attractive investment opportunity. Firstly, physical gold has to be stored and transported, not to mention the cost of security, which is often beyond the scope of interest of most regular investors, who are simply interested in speculating on the price of gold, rather than becoming fully-fledged gold dealers.
In addition to the pragmatic reasons for choosing CFDs, the costs of transacting and the benefit of the CFD structure ensure that CFDs tend to win the day in the eyes of most traders, as opposed to dealing in gold directly. Because CFDs are an inherently margined product, and because the costs of leveraging transaction sizes are comparatively minimal, traders can take much larger positions than they could otherwise afford in order to profit more heavily from smaller ticks in market prices, making CFDs an attractive, popular choice for investors looking for more from less upfront investment.
Who Trades Gold CFDs?
Gold CFDs are traded by a variety of investors and speculators, particularly during times of extreme stock market volatility. Despite common belief, CFDs are traded right across the investment industry, from the very smallest to the very largest operators, as a means of providing cost-effective, leveraged exposure to the gold markets.
Private investors tend to trend towards gold CFDs as a means of weathering market storms in the money, bonds and securities markets, and particularly for those with a heavily diversified portfolio, gold CFDs can be one profitable avenue for trading. Especially when demand for gold looks set to rise over the shorter term, exposure to gold CFDs can enable private investors to capitalise heavily on incremental price ticks, to deliver a substantial profit in a matter of hours.
For larger investors, such as institutional investors and funds, gold CFDs are seen as an alternative to the more stagnant investment of physical gold, and being in a position to highly leverage allows funds to take a much shorter-term exposure to gold – perfect for those looking to quickly scalp profits from market uncertainty. Of course, this has to be tempered with the risks associated with leveraged trading, equally applicable in CFDs as with all other forms of margin investing, but by enabling a quicker transaction, funds are arguably less exposed to the potential negative fluctuations in price that could result in significant losses.
How To Trade Gold CFDs
Trading gold CFDs effectively requires an understanding of the market for gold, in addition to a basic grasp of CFD trading. Depending on your margin requirements, which can at times be less than 5%, trading gold through CFDs can be extremely tightly leveraged, meaning small ticks in price deliver heavy returns. Of course, this has to be weighed up against the costs of financing, which accrue daily for the duration of the position, but with margin working in your favour, trading gold CFDs has the potential to be very lucrative.
Strong signals to look out for when trading gold are market uncertainty in the stock markets, or other forms of financial and economic hardship which might drive investors to head for the hills. Aside from these externalities, gold CFDs can also be traded on statistical data using recent graphs to determine pricing highs and lows. Gold, as with most things, tends to trade in cycles, so tapping in to the progress of these cycles by analysing previous pricing data can give the signal you need to jump on board with a position in the gold market via CFDs.