For those who like to invest in precious metals, gold is the most popular option. Why and when do investors turn towards the gold? Gold trade thrives during economic or political crisis when nothing is safe and certain and the market is volatile. This includes investment market declines, inflation, war, social unrest and similar unwelcome political and social uncertainties. Gold is a resource that can never lose a significant amount of its worth, unlike some other currencies.
Understanding the basics
The largest gold trading markets are found in London, Hong Kong, Sydney, New York, Zurich and Tokyo, but London market is currently the most influential. What are the factors that affect the price of gold? Those would be: global inflation, changes in oil supplies, wars, industrial and jewelry demand and volatility in international forex markets and international monetary fund.
Before even starting to think about gold investment, you’ll need to learn about basic terms, tools of market analysis and different types of gold trade. Some basic gold price terms are bid, ask, spot and fixing price. For instance, the bid price is the highest value at which you can sell your gold at the moment, unlike the ask price which represents the opposite – lowest purchase price.
One of the safest ways to invest in gold is to purchase it in its pure, physical form (bars, coins etc.). Gold bullion is a form of pure (or nearly pure) gold, certified for its weight and purity by market bodies of legislation. In the EU, the minimum percent of purity so that bullion can be certified is 99.5 percent for bars and 90 percent for coins. They usually have a serial number attached for security purposes.
Buying bullion gives the sense of security to traders as they are certain that the gold is in their hands – and that is has (and will continue to have) a genuine money value. However, this investment requires a safe storage – which in most cases includes paying for deposit box or company’s storage space. While the benefit of this type of trade is less risk (steadier returns), the downside is that it takes more time to see positive results (profit).
Gold future is a legally binding agreement and it includes trading at a predefined price. Futures contracts are available in 3 sizes (units): 100oz, 33.2oz and 10oz. They are bought when it’s estimated that the price will go up and sold when it’s likely to go down. Gold producers can “lock in” a selling price by using a short hedge, and long hedge can be employed for securing a purchase price.
One of the greatest advantages of future trading is that it doesn’t require as much starting capital as bullion and it represents a flexible and cost saving way of trading gold. The most vibrant trading months are February, April, June, August, October and December. We recommend having a look at some of the free online resources regarding this topic as they can be quite helpful when starting trading futures.
Gold exchange traded funds (Gold ETFs)
A gold exchange traded fund consists of contracts that are only backed by gold and its strategy includes tracking and reflecting the price. This means that investors don’t actually own gold in any form, but they receive the cash equivalent of it – they can gain exposure to its performance. What is the logic behind it? The ETF was in fact introduced as a less expensive alternative to bullion and futures trade.
This type of investment has its advantages: it can be used to hedge commodity risk or gain exposure. When US dollar is weak, the price of gold usually rises. With dollar downside in mind, purchasing a gold EFT sounds like a good solution as it helps in hedging the exposure. However, ETFs has cons as well – since the ownership is represented as a part of collectible, a long-term investment means significantly higher taxes.