CFD Gold Trading 101

Gold is part of the precious metals complex. Historically, gold has been used as a sign of wealth. In today's market, gold is held as part of a diversified portfolio as a non-correlated asset. Gold has often been linked as a safe-haven asset that outperforms stocks and bonds during adverse market conditions.

There are multiple ways to trade gold, including purchasing physical bullion, purchasing OTC contracts, investing in price movements such as CFDs, futures, and ETFs, and trading the companies that produce gold. You can transact gold online or even bring your valuable gold to a physical store.

Investors often store gold in a registered warehouse or bank, but many people feel comfortable keeping their gold in their homes.

The History of Gold Trading

Gold has a long history connected to money. It has been traded for centuries, and only in the last couple of decades did investors start gold trading online. There have been discoveries found in inscriptions from ancient Egyptians and references in the Bible about gold. In the early 17th century, gold became the standard for money.

An amount of gold-backed funds from different countries determined how much your currency was worth. The official global acceptance of gold as the standard was agreed to in 1870. A gold fixing price started with Rothchilds bank in London in 1919, which formally determined the price of gold bullion.

During the Second World War, it became clear that there was a need for a process that would replace the gold standard after the War. The Bretton Woods Conference in 1944 solidified this agreement. The standard became the U.S. dollar, fixed at $35 per ounce of gold, and all other currencies floated around the U.S. dollar.

During his Presidency, Richard Nixon terminated the Bretton Woods agreement and started the Forex market that has developed into today's market.

Why Do Investors Own Gold?

Gold continued to develop over the decades as an alternative to paper money. While many individuals like to hold cash in the bank, many people preferred gold bullion or coins as a currency alternative over the decades. During periods when the world's reserve currency starts to tumble, as it did from 1998-to 2008, individuals tend to flock to gold as an alternative currency.

Investors looking for an alternative to paper money will often turn to precious metals such as gold from companies that sell gold coins, gold bullion, or gold bars. You can buy physical gold from an online operation or go to a reseller who will provide you with physical gold.

The gold price that is most often quoted (either the gold price on the London interbank fixing) or gold prices quoted from the New York Mercantile exchange is for a specific grade and quality of gold. Gold must be 99.999% pure to qualify as deliverable to the NYMEX. This level eliminates gold that is 14 carrots or 18 carrots, as there are many impurities in these gold items.

Gold can also be made into Jewelry. The yellow metal is often given as gifts for families to own as wealth and use the metal for practical purposes. In some cultures, gold is provided as a dowry as a wedding gift to help a new couple get on their feet.

Gold is often used as a way to diversify a portfolio. Many CFD investors prefer to trade a combination of investible products that do not always move in tandem. Gold historically beats to its own drum. The correlation coefficient is the statistical measure that determines if two items move in tandem. A correlation coefficient of 1 means that two assets have returns that move perfectly in tandem.

A correlation coefficient of -1 means that the two assets have returns that move in the opposite direction. Historically the correlation between gold and stock prices is very close to zero, which means there is no observable movement between these two assets.

How Do you Trade Gold Online?

There are several ways to trade gold. You can purchase it physically or purchase another financial instrument that tracks the movements of gold. If you are interested in trading gold using an item that tracks the movements, you will want to know how to trade gold online as CFDs.

Popular ways to trade gold include trading contracts for differences or CFDs. These are financial instruments that track the prices of gold and provide you with a financial instrument that does not require that you ever own physical gold. A CFD financial broker offers CFD trading.

Another form of gold investment that you can trade online is ETFs. These products are stock-like investments that hold other instruments like gold futures.

Gold is sometimes traded through the over-the-counter market. Large financial institutions such as banks will often trade with each other using a gold forward sale or swap to speculate on the direction of gold prices.

The Bottom Line

Gold has a long history as a traded commodity often used as currency. Gold prices are usually non-correlated to stocks and bonds, and therefore, they are a welcome addition to a diversified portfolio. Some people like to purchase physical gold.

You might also consider financial instruments that track the movements of gold prices, such as CFDs or ETFs. Gold is also traded in the over-the-counter market. Large financial institutions will often trade with each other or central banks. In many cases, the over-the-counter transaction is financially settled, but in some cases, they exchange gold bullion that they hold in reserves.