Trading Physical Gold
Learn How to Trade Gold Here
Most trading in physical gold is conducted in gold bullion. The three major centres of physical gold trading are London, New York, and Zurich. The gold market in New York, like London, is also a large centre of gold derivatives trading.
The New York gold market, Comex (part of the New York Mercantile Exchange) opened in 1974, 55 years after the London Metals Exchange. There are, of course, many other gold markets around the world, including Tokyo, Hong Kong, and Dubai. Australia, too, being one of the largest gold producing countries in the world, has its own gold market in Sydney. What this all adds up to is 24 hour trading of physical gold around the globe.
The London fixing price, conducted at 10:30am and 3pm London time, is the official price at which the world bases its gold contracts and is used by high street dealers and online dealers alike.
Many of the major gold trading companies, and large gold dealers, around the world store their gold in secure vaults in London or Zurich.
Access to Trading Physical Gold
An individual investor does not have access to the London market, for two main reasons.
Firstly, the standard size of a gold bar in the market – called a London Good Delivery Bar – is 400 ounces, weighing a little less than 12.5 kilograms. With gold at around $1600 an ounce, the price of one bar would be in the region of $640,000. ERach bar will be stamped confirming its purity (99.5%), and have a serial number and year of manufacture.
Secondly, even an individual who had the money and wanted to trade in gold would find the process of registering to trade more than a little cumbersome. There are regulatory issues to overcome, as well as delivery and storage questions.
It used to be that trades struck on the London Metal Exchange were settled directly between the two counterparties to the trade. However, now the central clearing house, Clearnet, administers each trade. Providing the details of the trade match between the two parties – size, price, and settlement date – then Clearnet accepts the responsibility to settle the trade as two separate transactions (one buy and one sell) between it and the trade counterparties.
How an individual can trade physical gold
Though not able to participate on the London Metal Exchange, individuals can trade in physical gold in a variety of ways.
Finding scrap gold, old jewellery, rings, bracelets, and the like, is becoming more popular as the price of gold escalates. Using a reputable high street dealer to sell scrap gold can gain good rewards, though it’s always best to remove stones before selling. The dealer will be interested only in the gold content and its melt value, and that will be based upon the purity and weight of the gold he buys.
Gold jewellery bought from antique fairs or other individuals can be sold at auction, or to other individuals for profit.
Bullion and Coins
More common nowadays is the trading of gold by individuals in bullion bar or coin form, and increasingly such trade is conducted online.
Coins will have a value based upon collectability, and be determined by factors such as rarity, history, and condition rather than actual gold content. Building a relationship with local specialist dealers can reap its rewards, though coins can also be bought and sold on the internet. However, using internet auction sites comes with its own caveat: there are plenty of horror stories about investors buying coins in good faith, only to find that they are counterfeit. When the investor returns to complain, the seller has mysteriously disappeared.
For this reason, those looking to trade gold and speculate on the price of gold tend to concentrate on bullion trading.
Many dealers will both buy and sell gold bullion, though prices will be posted around the official gold price to allow for the dealer’s costs of buying and selling, as well as settlement and delivery.
Bars come in a variety of sizes to suit all investment pockets, and there are many firms, such as Bullionvault, that offer storage facilities which means gold can be traded more easily without the need for physical delivery with each trade.
Many individual traders will buy and hold physical gold for some time, waiting for the price to rise before selling at a profit. The costs associated with trading gold – the discount to the spot price on sales, and the premium to spot price on purchases – combine with storage and delivery fees to make buying and selling many times a day unprofitable for most individuals.
However, the volatility of the gold price means that gold trading can be very profitable.
A word about Taxes
Trading in any financial instrument may incur taxes of one sort or another. For example, dividends paid out on shares will incur income tax. Trading in gold is likely to attract capital gains tax, though investors should check the relevant tax laws in their jurisdiction.
Most trading of physical gold is conducted by Central Banks and institutional investors. But increasingly individuals are becoming involved in trading gold.
Trading gold in its physical form can be exciting and profitable, but it doesn’t come without risk. The wise gold trader will conduct plenty of research, both into products and dealers, before committing his capital. By doing so, he will keep risk down to a minimum and be better placed to make portfolio changing gains.