Gold is considered the ultimate symbol of prosperity and wealth and has always been a favored asset for investors. As one of the oldest investment vehicles in the world, this precious metal plays a critical role in the global economy.
If you’re thinking of diversifying your portfolio by dipping your toe into gold trading, read on to learn about the basics, methods, pros and cons of gold trading, as well as the factors affecting gold price.
Gold Trading Explained
Gold trading is the process of buying and selling yellow metal in an attempt to gain profit from price movements. A trader buys the gold assets when the price is low and sells them when it’s high. A trader may also take short positions for gold assets when the prices are expected to drop.
Gold trading allows you to obtain exposure to one of the biggest commodity markets on the globe. Plus, gold is considered one of the most important metals in our economy and contributes to technological developments, making you a part of something truly interesting.
That said, trading gold requires careful consideration due to the metal’s high volatility and numerous trading options. These include:
- Gold Contracts For Difference (CFDs)
- Gold Mining Stocks
- Gold Futures
- Gold Exchange-Traded Funds (ETFs)
- Gold Options
Pros Of Gold Trading
- It’s A Safe Haven
Like any investment asset, gold prices fluctuate and can become highly volatile. However, it has maintained its value in the long term. Thus, it’s considered a stable investment or a safe haven. This means that gold assets will always have value, making it one of the most stable investments available.
- It Helps Fight Against Inflation
Inflation is the primary enemy of an investor. And gold has been historically proven to be a good hedge against inflation and is a powerful portfolio diversification tool. This is because gold has a low correlation with stock prices and other investment instruments. So, when the stock market crashes, gold prices may increase as people sell their stocks to buy more stable investments like gold.
- It Has High Liquidity
Gold assets are highly liquid. This means that sellers can easily find buyers and vice versa. Even the market for physical gold is highly liquid since it’s not that difficult to find a buyer or a seller.
Cons Of Gold Trading
- It Doesn’t Offer Any Yield
Unlike other assets, gold doesn’t provide you with any yield. For instance, stocks may pay you dividends while banks can provide interest. Gold investment doesn’t offer you any ‘bonus’ revenue other than the profit you get from trading.
- You Need Secure Storage
If you’re holding physical gold, then storing it can be expensive and complicated, depending on the amount of gold you own.
- High Commissions And Premiums
Trading gold often comes with high premiums and commissions. A broker or vendor may even charge you more if you only buy small units. So, consider doing your homework to find a reliable broker that charges low commissions to avoid unnecessary expenses and maximize your investments.
Factors That Affect Gold Prices
Understanding what influences gold prices can help you make well-informed decisions and minimize risks and losses. Here are some of the factors that cause gold price fluctuations:
- Interest Rates
In general, higher interest rates tend to lower the price of gold. A higher interest rate can make other investment assets like bonds more attractive than a non-interest-bearing asset, such as gold.
As mentioned before, gold is a safe haven asset during inflation and times of financial stress. Investors tend to turn to gold trading during these times, which causes the price to rise.
- US Dollar Value
Gold prices tend to move in an inverse direction towards the US currency. As the US dollar increases in value, gold becomes more expensive for investors using non-US dollar currencies, causing demand to fall. In contrast, a drop in the dollar’s value can make gold cheaper for overseas investors, increasing demand.
- Global Demand
Demand for physical gold also impacts the price of this precious metal. Normally, gold is often used in jewelry. The increasing demand for gold jewelry but lower supply is one of the main reasons why gold has been steadily increasing since the ‘70s.
In addition, global demand for precious metals has exploded in the last few years due to technological advancements. Gold is even used in the production of electronics, such as smartphones and computers, as well as other industrial applications.
As you can see, gold trading is a powerful move to help diversify your investment portfolio. But before you fully dive into the world of gold trading, make sure to learn more about the industry to maximize your investment.