If you are interested in trading gold, there are a number of important decisions that you have to make before you even get started. For starters, you need to decide how much of your assets you want to allocate into the gold market compared to other investment opportunities and compared to your total income. You also need to decide whether you are going to invest in gold and hold it for the long term, or whether you are going to trade in gold more regularly, looking for faster profits. You need to decide whether you are investing in gold because it is a solid place to put your wealth during unstable economic times, or whether you are doing so because it is more generally a solid wealth generating vehicle. There are a lot of questions you have to ask yourself before you even start.
One of the most important questions you need to answer before you purchase your first bar of gold is whether you are going to trade gold, or whether you are going to trade gold futures. The distinction is somewhat small and subtle, but it can make a huge difference in how much you earn- or how much you lose. You need to understand which side of the gold trading coin you are going to sit on as early as possible because these two different methods of trading require significantly different strategies.
So for starters- what’s the difference between these two methods of gold trading? Essentially, when you are simply trading gold than you are buying and selling it according to the current market price for the metal. This form of trading is extremely simple. You pay the exact current price of the gold when you buy it and you earn the exact current price of the gold when you sell it. With this method of trading, there is little to do except purchase gold as cheaply as possible and sell it when the price raises a significant amount.
Trading gold futures works somewhat differently. It is a more complicated and riskier method of trading, but it can also produce significantly higher gains in a shorter period of time. Essentially, when you are trading gold futures you are betting that the price of gold is going to go up. You make a bid to purchase gold in the future for the present price. So if the price of gold goes up, then you were able to purchase it at its current lower price, and you can then sell it at its higher price. If the price goes down, however, you will lose money.
One aspect of purchasing futures is the fact that you don’t actually pay the full purchase price for the gold you are buying, which allows you to essentially buy much more gold than you can actually afford. For example, you might only pay 10% of the price of all the gold you wish to purchase a future of. So if you purchase $1,000 worth of gold you only need to put in $100. Because of this math, in this example the price of gold only needs to raise 10% to double your money- but it also only needs to drop 10% to lose all of your money.
The style of gold trading that you decide to buy in to is going to depend a lot on your investment goals, your tolerance for loss, how much time and attention you care to give to your investments, and the like. It’s a good idea to learn more about gold trading in depth before you make your final decision.