Trading Gold

Piggy has noted with interest that On-line Trading has not only created access to currencies but has enabled investors to diversify their portfolios by taking advantage of spot trading in a well-balanced trading portfolio. Trading spot metals creates great opportunities for hedging in every liquid market, with investors gaining more exposure with limited risk.  Spot gold (XAU), which is considered to be a safe haven, is one of the tradable commodities offered through on-line trading. 

Spot trading is done similarly to forex currency trading where investors take short or long positions of the metals’ prices. However, the real question is; Why should investors trade or invest in a yellow mineral called “gold”? The answer lies in the characteristics of gold itself such as (i) it does not rust or corrode, (ii) it can be divided into measurable quantities and can be stored and (iii) it is acceptable as a medium of exchange everywhere and by everyone. As the saying goes, “It is just as good as gold”.   The following are some of the global finance dynamics that should always be considered when investing or trading in gold;

  • The US dollar – This is because gold is priced in USD and an appreciation in the USD implies that gold will become more expensive for buyers;
  • Interest rates – Monetary policies by leading global central banks such as the Fed have a direct impact on bond yields. For example, interest rate hikes may drive real rates, which may lead to a more negative outlook for the gold price;
  • Economic outlook in China and India – Over the past two years, nearly 50% of global demand for physical gold has come from the combined Chinese markets and the Indian sub-continent.  Economic growth in these countries has a direct impact on the demand for gold;
  • Geopolitical risks – The fact that gold is considered a safe haven asset means that on-going concerns about economic growth and financial stability in certain emerging markets can boost the demand for gold; and
  • Price momentum – The price of gold can also be influenced by investors following an upward trend.

Gold prices have largely remained stable since the beginning of the year following developments in the US. Nonetheless, there are still a number of positive factors that support gold pricing such as fundamental investment and jewellery demand from China and India and systematic central bank purchases. Piggy recalls that gold experienced one of the strongest rallies in Q1 2016, gaining 17% in USD terms which made it one of the best performing global assets. It also outperformed other asset classes, including major equity indices – some of which posted outright declines. It might be worthwhile to start trading gold!

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