Gold CFD Trading Explained:
A How-To Guide

Gold stands as one of the most prized commodities in the global market, from its historical allure as a benchmark for bartering, to its modern-day, scarcity-led value. Now, trading gold can even be done online through Gold CFDs (Contracts For Difference), instruments which track the value of the underlying asset. Given the complexity and nuances of CFD trading across all asset classes, its crucial to understand the mechanics and how to manage risk effectively before engaging in the exciting gold-trading market.

So, within this beginner’s guide to trading gold CFDs, we’ll explain their two-way benefits, as well as the concept of leverage and its potential rewards and risks for retail gold traders. We’ll also explore some credible alternatives to gold CFDs if you still want to invest in the value of gold without using this derivative instrument.

How Does Gold CFD Trading Work?

CFDs are a highly liquid derivative that lets you trade gold, silver and other precious metals without the need for physical ownership. Instead, you can buy or sell a specified amount of gold represented by the CFD. This instrument makes a profit or loss if the underlying market value of gold moves for or against your position. You can include the use of margin to amplify your exposure to the asset, but it’s also important to note that doing so also increases the potential risks.

There are two ways you can trade with gold CFDs. You can “go long” and “go short”. Below, we’ll demonstrate how both CFD gold trading concepts work in practice:

• Going Long

  If you expect the price of gold to rise, you will want to “go long” by opening a buy position for a gold CFD at the current bid price. A standard lot purchased usually equates to 100 ounces of gold, with most trading platforms allowing you to get exposure from as low as 0.01 lot (1 ounce) or as much as 10 lots (1,000 ounces).
  
  For simplicity’s sake, let’s say you opened the long trade for one lot (100 ounces) when gold was worth $2,300 per ounce. The total value of your position is therefore $230,000.
  
  When the price of the underlying asset rises to $2,350 per ounce, your gold CFD contract follows suit. Thus you will be sitting on a total profit worth $5,000 because: ($2,350 x 100) - ($2,300 x 100) = $5,000.
  
  At this stage, you can decide to sell your gold CFD at $2,350 and take the $5,000 profit.

• Going Short

  If you feel the price of gold per ounce is set to fall, you can “short” gold by opening a sell position for the gold CFD. This strategy profits when the value of the asset falls below the initial entry price.
  
  Let’s say that you shorted gold at $2,300, with your contract worth one lot (100 ounces). The price falls sharply within a week to $2,200. This means you’re sitting on a short position worth $10,000 profit [($2,300-$2,200) x 100 ounces] to your trading account, even though the value of gold has declined.
  
  As with long positions on gold, you can close out short positions with gold CFDs and lock in the profit i.e. the price difference between your entry and exit orders.

You can also buy and sell gold CFDs using a feature called leverage. Essentially, this allows you to commit only a small percentage of the total value of a trade.

When you’re CFD gold trading for the first time, choosing a trading platform that offers competitive spreads is crucial. A spread is the difference between the buy and sell price, so the tighter the spread, the less your trade has to move to become a profitable position.

Also, look for a platform that has near-perfect uptime and robust near perfect uptime and stability to ensure that your trades are executed smoothly.

Other Ways to Trade Gold

If you decide CFDs aren’t the most appealing option for you to trade gold, there are several other routes to gain exposure in gold markets:

• You could buy and sell gold exchange-traded funds (ETFs) which track the benchmark price of gold.
• You can also try spot gold trading, buying, and selling the value of gold against major fiat currencies like the U.S. dollar.
• You can even take out gold futures contracts which lock you in to buy or sell gold at a set price on a future date, though these will have a relatively high barrier to entry as standard contracts represent 100 ounces of gold.
• Or even the "old-school" route of buying physical gold bullion and storing it securely as part of your personal wealth?

Benefits of Trading Gold CFDs Online

Highly Liquid

Using a CFD gold trading account, you’ll always be able to get in and out of the market fast. This creates an abundance of trading opportunities with gold CFDs, including the option of scalping the value of the underlying asset by reacting to the latest information or sudden market changes like hitting points of support or resistance.

No Need to Physically Own and Store Gold Bullion

The benefit of CFD trading is that you merely speculate on the price of the underlying asset. You don’t need to physically buy gold bullion, eliminating storage and security concerns associated with holding real gold as a store of value. Instead, you can go long or short on gold CFDs and make instant profits if the market price moves in your favour.

Quick and Convenient

Most CFD gold trading hours are 24/5 – with the markets open from Sunday evening to Friday evening. This means it’s very accessible, especially when you trade gold live online with a broker that supports industry leading software like MetaTrader 4 and MetaTrader 5, or even their own native mobile trading app.

Lower Barrier to Entry

If you decide to trade gold futures contracts or the spot gold price, you’ll need significantly more upfront capital to trade with than CFD gold online trading. In fact, with a CFD gold trading account, you can trade using leverage to increase your position up to 1,000x the size of your committed deposit.

What Makes Gold Move?

Over $100 billion worth of gold is traded daily. This makes it a buoyant market, which is preferable from a trading perspective because it means the market has plenty of liquidity (a measure of how much buying and selling activity is taking place).

The more activity there is, the easier it should be to enter and exit positions. That's important when you're trying to seize the best prices during trading hours.

Short-term gold trading prices can fluctuate significantly, which is great news for CFD day traders. The main factors that influence the price of gold are:

• Supply and demand from the jewellery industry

  A large chunk of global gold demand comes from the jewellery industry. In nations with high gold consumption, like China and India, cultural and economic factors can influence gold prices. Festive seasons and wedding seasons can cause demand to spike and market prices to soar.

• Its relationship with the US dollar

  The spot price of gold has an inverse relationship with the U.S. dollar, especially since it’s priced in USD. If the dollar is strong, gold therefore becomes a more expensive commodity in other foreign currencies, curbing demand, and stunting prices. A weaker dollar can make gold a cheaper buy for overseas traders, thereby increasing demand and market value.

• Economic and geopolitical unrest

  During periods of high inflation and political uncertainty, people often invest in gold because it’s proven to be a relatively safe long-term asset. The biggest issue of high inflation is its ability to erode the consumer’s spending power. Buying gold as a store of value can help to shield personal wealth. Even political events like elections, geopolitical tensions including the threat of war or even financial crises can increase gold purchases and drive demand.

Diversify Your Portfolio by Trading Gold CFDs

In summary, trading gold CFDs can be a strategic avenue to diversifying your investment portfolio and hedging against inflation risks. With a low barrier to entry and higher exposure - thanks to leverage - trading gold CFDs could be a cost-effective approach while also offering flexibility for agile traders as the ability to profit from shorting gold gives you two ways to achieve returns in both bullish and bearish markets.

As such, be sure to do as much research on gold CFDs as possible before risking a penny of your hard-earned money.