How to Invest in Gold
Gold is a popular precious metal that has always been in demand and attracted investors. Many novice investors have begun thinking about putting their money into this asset. There are many ways to buy gold or invest in it, and they all have their advantages and disadvantages. In this article, we will analyze the most popular ways to invest in gold, and determine which methods are the most profitable.
Why Invest in Gold?
There are several chief reasons why people invest in gold:
- To have protection in case of inflation.
- To diversify their investment portfolio.
- For speculative profit based on the rise or fall in price.
Protection against inflation is the main function of gold as an investment instrument. Even stable currencies such as the US dollar or the Japanese yen depreciate over time. Bank deposits only partially offset inflation and certainly don’t allow you to generate a decent income.
Over the years, gold has become more expensive, not only compared to fiat money, but also in relation to most goods and services. Today, an ounce of gold can buy more wealth than 100 years ago. On the other hand, 100 years ago, $1,000 was a fortune. Today, it is below the normal salary given in an average European country.
Diversification of an investment portfolio usually attracts the interest of experienced investors, although an advanced beginner can also acquire such protection against risks. When the portfolio consists mainly of stocks or futures, gold will be the most stable and reliable asset in it. In periods of economic instability, when stock markets fall, the price of gold, on the contrary, increases. The increase in the value of gold in the investment portfolio, partially compensates for losses due to the fall in share prices.
Despite the fact that gold is considered to be a stable asset, in the short term its rate is quite volatile. This gives the investor an opportunity to earn money.
Variability of the gold exchange rate allows traders-speculators to earn money. Unlike stock market shares, gold is available for trading 24 hours a day, five days a week. In the Forex market gold is one of the most popular assets, yielding only EUR/USD and a few more major pairs.
Tips for Gold Trading
Let's consider a few tips for those who want to start trading gold and making profit.
Watch Out for Central Bank Buying or Selling
Central banks are the largest and the strongest players (market-makers) in the Forex market. Central banks often make «buy and sell deals» with gold, controlling the gold reserves of the country. You can predict how the price of gold will change by tracking such deals.
Consider the Demand for Gold Jewelry and Industrial Demand for Gold
The jewelry industry, and the industry as a whole, are the main consumers of gold - together they consume more than 90% of all production. This is one of the main fundamental and objective factors influencing the price of gold. The higher the industrial demand for gold, the more reasons for its price to grow.
Correlation with the Japanese Yen
The Japanese yen, like gold, is considered a sanctuary asset. In times of economic instability, traders invest in these two assets, while in periods of growth they prefer something riskier. Gold and yen rates correlate, i.e., they move in the same direction. Analyzing the exchange rate of the yen, it is possible to predict the future price of gold.
Gold Is Volatile
In the short term, gold is often more volatile than currency pairs. The asset price can change by 100 points in just a few minutes. This movement can bring both big profits and big losses, so novice traders need to be careful not to use large leverage.
Trading from Support/Resistance and Fibonacci levels
Gold is sensitive to price levels. One of the best trading strategies based on technical analysis is to trade from support/resistance and Fibonacci levels.
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