Gold is one of the most popular assets traded worldwide by investors, commercial banks, financial institutions, and hedge funds.
Understanding what drives gold prices and choosing the right investment vehicle can be challenging. Here’s a short guide on gold trading, explaining the factors that impact gold prices and ways of investment:
What Drives Gold Prices
Here are four factors that drive gold prices:
Inflation: Gold prices have nearly always increased during inflationary periods. For instance, when inflation spiked in the 1970s, gold prices surged from $35 per ounce in 1971 to over $850 by 1980. A similar trend has been recorded in the mid-2020s.
Supply and Demand: Just like any commodity, gold prices heavily depend on the principle of supply and demand. For instance, during the COVID-19 pandemic, when mining operations were halted, supply decreased. During festival seasons in India and China, the demand for gold increases. In simple terms, when demand exceeds supply, gold prices increase and vice versa.
Market Sentiment: The overall feeling about gold’s prospective future also impacts its price movements. When there is economic instability, people tend to panic and sell assets.
Central Bank Demands: Many central banks globally acquire gold to diversify their reserves. Think of it as a protective measure to tackle periods of financial crisis. As more banks acquire gold, its price rises.
Before you begin gold trading, familiarise yourself with all the factors that impact price movements.
Choosing a Gold Investment Vehicle
So, how can you actually trade this precious metal? Here are some ways:
Physical Gold
Purchasing physical gold in the form of coins, bars, and jewellery is pretty common. As a tangible asset, it provides a sense of security and ownership. Moreover, you can sell it anywhere in the world. However, storing physical gold can be challenging.
Gold EFTs
If you wish to invest in gold without worrying about physical ownership, gold ETFs are the way to go. Gold Exchange-Traded Funds (ETFs) act like regular stock, but are used to track the price of the metal.
Gold Futures and CFDs
Gold futures and contracts for difference (CFDs) allow you to speculate on price movements without owning the physical metal. These are often preferred by experienced traders.
Gold Mining Stocks
Gold mining stocks are a way to get ownership in gold mining companies. When gold prices rise, the price of shares will also increase. However, it comes with specific company regulations and restrictions.
Gold Mutual Funds
Gold mutual funds also liberate investors from the stress of storing physical gold. Investors can buy and sell units at any time, ensuring flexibility.
Gold as a Safe Haven
During times of economic instability and political unrest, the value of fiat currencies takes a significant hit. Investors begin looking for assets that can retain their value. Gold provides a hedge against inflation due to its store of value.
When inflation erodes fiat currencies, gold emerges as a safe haven for investors to protect their wealth and earn profits.
