Gold prices have shown significant volatility lately.  Volatility equals trading profits for the trader who is on the right side of the market.  How can you profit from this volatility?  This article is about how you can gain exposure to gold as a trader (rather than as an investor).

An investor would take a long term view on gold.  So they may choose to hold non-numismatic gold coins, kilo bars of physical bullion or certificates from bodies such as the Perth Mint.  But these don’t give you exposure to gold as a trader because you can’t buy or sell them quickly enough, and the trading costs are too high.  How can you trade gold?

One way is to use gold futures contracts.  Depending on the exchange, these may give you exposure to 50 ounces or more of gold for a small margin (perhaps 5%).  So if gold prices move by 5%, then you can either double your money, or lose it all. Gold futures are highly liquid, and traded 24 hours a day, 5 days a week.

Another approach is to buy a gold ETF (exchange traded fund).  This is a fund that holds physical gold bullion, but is traded on stock market where it can be bought or sold.  This is actually my personal preference.  It offers liquidity, but no leverage and is as easy as buying or selling a share.

You could also buy shares in a gold producer such as Newcrest.  This is a slightly less direct way of gaining exposure to gold, as you are buying stock in a company which has other factors affecting the price besides gold.  But generally it is a fairly good proxy for the gold price.

If you required more leverage with shares, you could buy a put or call option over a gold ETF (if available), or buy a put or call option over a gold futures contract.

In the forex market, currencies from gold producing countries such as Canada and Australia are to some degree correlated with gold prices.  You could purchase these currencies as proxies for gold.  Again, the correlation is not perfect, and other factors come into play.

Which ever way you choose, remember to have a good trading plan with a backtested trading system.  Always set stop losses.  Don’t over trade and watch the market carefully for sudden shocks.

Good luck in your gold trading.

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Tags: Commodities, gold futures, gold shares, Gold trading

This entry was posted on Monday, March 24th, 2008 at 5:46 am and is filed under Commodities. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.