Why You Should Trade Gold CFD’s
Throughout history, gold has been one of the most valuable natural substances by individuals, cultures, religions, and governments. For hundreds of years, gold has been the foundation of almost all currency systems and was even closely linked to the US dollar all the way until the 1970s.
If you’re familiar with the brokerage IG, you might be surprised to find out that its original name was “Investor’s Gold” because it was initially launched to allow their clients the opportunity of trading gold instead of owning it. Today, very few currencies are backed by gold or any precious metal of any kind. However, gold is often considered a “safe bet” for traders, particularly during times of high market volatility.
The Five Steps You Should Take Before Trading Gold
- Market Analysis: No matter what you’re trading, it’s essential to carefully evaluate and analyze the data from your charts over a variety of time frames. Additionally, you should always back tester strategies on historical data and look for patterns, breakouts, or errors in your assumptions.
- Planning: After you’ve completed a thorough market analysis, the next step is to plan how you’re going to trade gold in what amounts. It would be best if you always had a plan for your CFD trading that’s supported by the data you gathered through your analysis. Be sure to stick to that plan so that you don’t get caught up in the “financial entertainment” of the day. Beside gold CFD you can also trade gold forex which is normally the option for advanced traders.
- Awareness: The movement of gold is slightly different from many other asset classes. For example, probably because of cultural conditioning, gold tends to push investors toward reactive emotional decisions more than treating other asset classes. That often leads traders to break from their strategy, make larger bets than is wise, or even increase their investment on an already losing position. Especially for beginning traders, it is crucial to remove this emotional variable from your trading by carefully following the plan and analysis that you’ve done previously.
- Mining Stocks: One indirect way to gather more data about gold prices is by observing the share prices on companies that mine gold. As these companies are directly affected by political, economic, and company events, it’s often much easier to predict the movement of these share prices than directly predict the price of gold. Beyond that, usually the share prices of these mining companies are lower than the price of gold itself.
- Gold ETFs: ETFs are becoming more popular by the day, and one way you can maximize your return on your investment in gold is by using a leveraged gold exchange-traded fund (ETF). These are a special kind of ETF that provides for the possibility of increased return a higher return than directly investing in gold itself. You can also balance your risk by also investing in an inverse gold ETF. Beyond that, many ETFs also include other precious metals such as silver and palladium.
Factors Which Drive The Price of Gold
Five significant factors influence the price of gold. Those factors are inflation, Financial stress, and political crises, Central bank policy, the dollar, and the demand for gold.
During periods of dramatic inflation (or dramatic deflation), gold tends to increase in value since it is generally independent of inflation. This tendency is particularly evident when the increasing inflation (or deflation) is sharp or sudden.
2. Financial Stress And Political Crises
Since 2008, gold has increasingly become a more popular investment vehicle because the price of gold tends to be stable or even increase during times of uncertainty. For example, the price of gold went up significantly during 2018 and 2019 because of growing trade tensions between the US and China.
3. Central Bank Policy
The price of gold is closely connected to interest rates. Since interest rates are directly controlled by central bank policy, even tiny percentage changes can significantly affect the price of gold. For example, during the 2008 financial crisis when interest rates were brought to nearly 0% in many countries, the price of gold soared.
4. The Dollar
For the past several decades, the dollar has been the de facto investment currency throughout most of the world. Because of this, when the dollar is particularly unstable, investors tend to sell their stakes in the dollar and purchase gold. This instability causes the price of gold to increase. Furthermore, when the value of the dollar decreases, this also causes other currencies to increase in value. This increase in value means that investors in other currencies are now able to purchase the gold that was previously unaffordable.
5. Gold Demand
As with all markets, the price of gold increases with demand. Additionally, the supply of gold is relatively fixed. This limited supply allows for a reasonably predictable increase in gold prices over time. In summary, the price of gold is expected to continuously increase over time because the demand is also steadily growing. Day-to-day volatility in gold prices is more often due to the previous four factors.
You can check the current gold rates for Dubai and UAE here.
Why Are Gold Investments Considered a Safe Haven?
Gold is considered a” safe” investment because independent from inflation, currency devaluation, supply increase, or corporate volatility. In other words, many of the variables that caused volatility and risk in our current market system do not apply to gold.
In contrast, many of the variables that cause growth in our current market system also do not apply to gold. In short, the price of gold doesn’t drop with the rest of the market, but it also doesn’t increase with the rest of the market. Thus, gold provides a good foundation for investment stability, but it also limits your growth potential. Consult with your financial advisor about how gold CFDs can help your portfolio.