The turmoil in the financial markets in recent years has turned a lot of traders’ interests to speculating in gold. The question is always to find the best way to make a trade that allows you to profit from your intuition of where the price is headed. Some traders choose to invest in mining and exploration stocks, but this does not represent a direct trade on gold prices. Physical gold, whether bullion or coinage, has security and storage problems. The futures markets are another alternative, but a much easier and more accessible vehicle introduced in recent years is the gold contract for difference.
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A gold CFD is a theoretical order to buy or sell a certain amount of gold, and the profit or loss on the CFD is determined by the change in price of the gold. As it is a derivative, you never have to deal with taking ownership of the metal, but you can enjoy all the profits as if you had. The other advantage is that it costs you a fraction of the amount you would need to buy the gold.
Depending on how and where you trade, you will find variations on the gold CFDs available. For instance, you may take a CFD over the spot gold price, which is the currently quoted price, or can choose to trade a CFD based on the gold futures price. Typically, there are standard sizes of contract such as 10 ounces or 100 ounces of gold, and also mini contracts at 1/10 of the standard size.
Whatever the size of CFD contract, the profit (or loss) that you make comes directly from the change in value of that amount of gold. The margin, or amount you need to buy the contract, may be as little as 3% of the value. You will be charged interest for every day that you hold the CFD, as if you had borrowed the money from the broker to buy the full quantity. If the price goes down, and you have a long position, you may also receive a margin call, which is an order from your broker to submit funds to cover your losses to date.
An example will help illustrate how the process works. Say that gold is quoted at $1071 to $1071.50. The second price is the offer price that you pay if going long. As you are bullish on gold, you take out a mini contract for 10 ounces at the offer price, which represents $10,715 worth of gold. If the margin is 3%, this would require $321.45 in your account.
A week later gold is quoted at $1094.50 to $1095. To close your contract, you sell at $1094.50. The value of the gold that you controlled has increased from $10,715 to $10,945, which is $230. The interest for holding this position for a week would be taken off this amount, but it is still likely that you would profit on your money more than 50% in a week.
Let's suppose you discover that the Gold market has been especially active as speculators keep pushing up the price - you think there is still room for further rises. The broker's quote for Spot Gold is 952.1-952.6.
You buy 30 Spot Gold CFDs at 952.6.
Points to note:In the next few days, you note that the Gold price has risen further and the broker's quote is now 965.2-965.7. You decide to close your position by selling at 965.2.
This realises a profit of (9652-9526) X your stake of 30 = USD$3,780.
Note: In this example daily financing costs have not been included for simplicity.
