Gold has always been a coveted asset to buy. It is seen as having advantages that no other asset class has. If a country’s entire political and economic system comes crashing, for example, stocks and bonds can become worthless in days. But gold will still retain its value. Additionally, it is very well-liked in the form of jewelry, which keeps its demand high. It is little wonder then that gold is actively bought and sold.
From a trader’s or investor’s point of view, gold is particularly attractive during challenging economic times. Like right now. There’s a good reason for this. In the past year, many stock market investments have resulted in losses for investors. But gold price has actually increased slightly. In fact, over the past five years, gold price has risen by over 40%.
What’s the Difference Between Trading and Investing in Gold?
How one profits from gold, depends on whether they are a trader or an investor. Even if gold price rises over a few years, there are ups and downs on the way there. Traders take advantage of these short-term changes in gold price. It can happen over a matter of days or even a matter of hours. Investors, on the other hand, will buy and hold gold for a long period of time.
Traders often use leverage to amplify their potential profits, but this also means that their losses can be significant if the market goes against them.
In contrast, investors generally purchase physical gold or gold-backed securities with the intention of holding onto them for a longer period of time, with the aim of profiting from the long-term appreciation of the precious metal. While trading in gold can be more volatile and high-risk, investing in gold can provide a hedge against inflation and market uncertainty.
How Do You Trade in Gold?
For anyone interested in trading in gold, it is essential to know what moves gold prices in the short run. Macroeconomic triggers like inflation, recession or policy changes can provide some of the best gold trading strategies. As pointed out earlier, a weak economy favors gold since it is considered a safe haven asset.
If gold price rises due to high inflation the reverse can happen too. Its economic events like these that traders can take advantage of. Similarly, policy actions like the ban on the sale of Russian gold last year by the G7 countries resulted in a small uptick in price. So, a trader that expected this to happen when the news came in, could have bought gold.
How Do You Invest in Gold?
Gold is easily available in the form of gold coins of different weights. They have the advantage of suiting various budgets. Gold bars are available too, but typically these ten to be higher priced because of the quantity of gold they hold. The challenge to holding gold in physical form is that it needs to be stored safely.
A good alternative is to hold gold in the form of exchange traded funds (ETFs). These funds buy gold, and a fraction of its value is sold as shares, which can be bought by investors. Because the underlying asset is gold, these share prices fluctuate along with its price.
Another way of getting exposure to gold is by investing in the stocks of gold mining companies. They might not always move in tandem with gold price, depending on the company’s own operational and financial condition. But they could to some extent, still reflect changes in the price of gold.
Advantages and Disadvantages of Trading in Gold
Trading in gold has the big advantage of being able to profit from short-term movements. With the economy in an uncertain place like right now, these opportunities can be higher than at more predictable times. Also, a trader can be long or short on gold, potentially profiting whichever way the price moves.
However, holding gold in physical form can be costly and impractical for a trader. This restricts them typically to the stock market, though some currency-related trades can also happen for gold.
Advantages and Disadvantages of Investing in Gold
On the other hand, a big advantage of investing in gold is that it can be held in physical form over long periods of time. It retains value whatever the economic situation is, if not increase in value. Also, the price of gold has risen over time. And it is expected to continue doing so, making it a good investment for the long term.
The disadvantage however is that gold prices can remain flat during times of economic growth. So, the investor might not feel like they have invested well during such times. In fact, stocks could rise far faster during such times. Also, gold does not provide an income as savings accounts or bonds do.
Another advantage of investing in gold is its ability to serve as a hedge against inflation. When inflation rises, the purchasing power of currency declines, but the value of gold tends to increase. This makes gold a good option for those looking to protect their investments against inflation.
However, a major disadvantage of investing in gold is that it can be volatile, with prices fluctuating rapidly and unpredictably. This can make it a risky investment for those who are not willing to ride out short-term fluctuations for long-term gains.
There’s no denying the value of gold as an investment class. It is not considered the safest investment for no reason. It holds value even when other investing options do not look attractive.
Traders have the flexibility of making bets on gold whether its price rises or falls. Investors, on the other hand, can hold it in physical quantities that are not practical for traders. Either way though, it can be a winning way to make money.