Trading a commodity such as gold involves the buying and selling of gold in different forms as a commodity through financial markets such as futures exchanges or over-the-counter (OTC) markets. This trade aims to make a profit from the gold’s (buying and selling) price fluctuations. Gold has from historic times been a good store of value. People have always attached usefulness and worth to the precious metal unlike other types of metals also used as money. Even in contemporary times, gold has continued to play this role and preserve its intrinsic value as a safe haven amid global political and economic upheavals.
Throughout history, it has proven to appreciate when other asset classes depreciate significantly. Though it is still subject to vagaries in some economic variables and government regulations, gold has outperformed other asset classes in its ability to retain value. In recent years, gold has seen a significant increase both in the volume of trade and the number of traders buying and selling it. The surge in gold trading is driven by the urge to guard against an array of economic uncertainties. In this article, you will gain more insight into the economics of what makes gold a choice store of value and trading commodity across the globe.
It has a Limited Supply with Constant Demand
Unlike paper currency which can be easily printed to increase their supply, the volume of gold on earth remains constant as the total physical gold supply can not be easily increased. It takes a lot of resources and time to prospect for gold, mine, refine and purify it. But despite the limited supply, there is a constant demand for gold as it is used for many things. In the fashion industry, gold is used in making jewellery, the manufacture of printed circuits and transistors in the electronics/tech industry and as collateral for loans and financing arrangements in the financial industry. This is to mention just a few.
Therefore, with a constant global demand, the value of gold remains hugely stable with the potential to appreciate over time. As a result of these qualities, traders have faith that the rarity of gold will sustain its value and price over time. Thus, this makes the metal an attractive investment option such that even during times of economic turbulence it is still traded profitably.
Gold is a Proven Hedge Against Inflation
One of the main drivers of gold’s appeal as a stable trading commodity is its role as a hedge against inflation. During times of inflation (rising prices over a period), traditional currencies lose much of their purchasing power significantly. In essence, it means that prices of goods and services rise with a fall in the purchasing power of money – more money will be used to purchase a few quantities of goods and services.
But unlike fiat money whose value is derived from government regulations, gold retains its worth if not even increase in price during inflationary periods. This is so because it is a tangible physical asset with intrinsic value that is not tied to one particular economy. Therefore, during periods of economic turbulence, it’s ability to retain value is what makes it appealing as a tradable commodity.
Portfolio Diversification and Risk Management
The key to smart financial trading and investment is diversification. With gold as a trading commodity in a portfolio, it helps to flatten out volatility and reduce the dependence on the probability that a particular investment/asset must yield profit. Being that it has a very poor correlation with other tradable commodities, it is rightfully positioned as a choice stabilizing force to trade and help offset losses.
This is made possible because when other commodities and sometimes investments are plummeting in value, it has proven to remain relatively stable. Due to this quality, traders have increasingly been adding and trading gold to help cancel out any losses they might incur. However, it should be noted that though it is relatively stable and safe to trade, profitable gold trading requires a well-thought-out strategy and a thorough understanding and interpretation of movements in the financial market.
Insight to the Practical Strategies of Gold Trading
Gold unlike some other commodities can be traded in different ways during stable and turbulent economic times. Depending on the trader’s risk tolerance and profit goals, they include the following:
- Hedging
Hedging is a risk management strategy often used by traders and investors alike to protect their trades against possible losses that might come from adverse price movements in the market. Hedging as a trading strategy involves taking positions in the market that would offset or mitigate the risk of gold price fluctuations.
- Trend Following
Trend following is for starters. It involves using technical analysis to trade in line with the current market movements. To make a profit for this strategy, however, the trader must constantly review the prevailing market trend and adjust positions to maintain the trend.
- Dollar-cost averaging
Dollar-cost averaging (DCA) is carried out when an investor divides the total amount to be invested into periodic purchases of a fixed amount of gold. This is often done regardless of the asset’s price. The essence of doing this is to reduce the impact of volatility by spreading out the purchases over time.
- Breakthrough trading
Breakthrough gold trading is used to capitalize on significant price changes that occur with the price of gold. The trader needs to constantly monitor prices to know when it break through a defined level of support or resistance before initiating a trade.
- Safe heaven strategy
This strategy capitalizes on trading gold during times of economic uncertainty as the value remains stable. Gold is considered a safe haven because in times like this, it retains its value and even appreciates, unlike other commodities.
Source: capitalfm
