Investing in Gold: Strategies and Opportunities
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The trends that can be observed right now can have a huge impact on investment portfolios, as well as methods and strategies for investing in gold and silver.
Investing in Gold: Should You Invest in Gold?
Among beginner traders, the question often arises whether investing in gold is a good idea. In fact, with so much gold news being released these days, most people are wondering if it's better to invest in physical gold in the form of gold bars or invest in gold futures or invest in spot gold.
The answers to these questions will be different for each person as it all depends on your overall performance and the fact that there are many different pros and cons of investing in gold. This is because gold is being used as an asset by different types of investors who have very different investment styles. Let's look at a few examples.
1. Long-term investment strategies
Gold is often used by long-term investors to balance their investment portfolio. For example, many fund managers allocate investments in certain proportions to stocks, bonds, and metals such as gold. The theory behind this distribution is asset diversification.
When one asset is not making a profit for you, another asset may be. Of course, when it comes to investing in gold, patience is key, as historically gold has been less volatile than the stock market.
However, long-term investment in gold bars can be problematic due to storage and insurance costs. Deciding how much of an investment in gold is objectively good can be a difficult task, as gold bars tend to be of a fixed weight and can therefore be quite expensive to purchase.
This is why some investors managing retirement portfolios or trying to invest in gold through an Individual Retirement Account (IRA) often focus on gold stocks or gold ETFs. An ETF is a fund that is a basket of securities to track a specific market, region, or sector.
SPDR ETFs are a wide range of different funds that were created and managed by wealth management company State Street Global Advisors.
The prospectus for the SPDR Gold Shares ETF states that their main purpose is to "reflect the price of gold bullion." This ETF was the first US-traded gold ETF and the first US-listed ETF backed by a physical asset – in this case, gold bars.
2. Short-term investment strategies
Some may choose to invest at the spot price of gold for shorter investment periods. The spot price or spot price is the price at which gold is currently trading.
Short-term traders usually speculate on an increase or decrease in the price of gold. This can be done in various ways, such as investing in gold futures.
The futures contract is one of the oldest forms of trading as it was originally created to facilitate trading. Essentially, a futures contract is simply an agreement to buy/sell or deliver a certain commodity on a certain date in the future.
Gold futures contracts are traded on the Chicago Mercantile Exchange (CME) and are widely used by large institutions. Because futures expire on specific dates, they are widely used by short-term traders such as intraday and swing traders to invest in gold.
When trading through CFDs, traders go long (buy) if they think the price will rise and go short (sell) if they think the price will fall.
With Gold CFDs, you simply trade on price action without owning the underlying asset. For short-term intraday traders who keep their trades open for minutes or hours, the speed of entering and exiting the market is important.
3. Hedging strategies
Gold is often used in a hedging strategy by larger fund managers. Hedging strategies are used to compensate for future losses in an investment portfolio. There are many ways investors use gold to hedge. Let's take a look at a few of them!
inflation and gold
Gold is often used to hedge against inflation. It is in this case that the investor expects that a commodity or security such as gold will protect him from the decline in the purchasing power of the currency that inflation causes. During an inflationary period, the prices of goods and services tend to rise, which means that for every unit of money you buy fewer goods and services.
For example, if the US dollar falls due to inflation, this means that the value of gold (in US dollars) will become more expensive. Thus, investors tend to invest in gold during times of inflation as they can benefit from higher metal prices and provide inflation protection.
Gold is a safe haven for investment
During times of economic instability or a stock market crash, many investors choose to invest in gold. This is due to the fact that the metal is considered a so-called safe haven: it is liquid enough for trading, but exists in limited quantities, which makes it valuable. Legendary investor Warren Buffett famously said, “Gold is a way to hold long positions on fear.”
In 2020, many investors were wondering, “Is investing in gold in 2020 a good idea?” Some investors are probably asking the same question for 2021.
However, last year the level of fear in the stock market reached a high not seen since the 2008 financial crisis.
The vertical dotted line in the chart above shows the moment when fear of the coronavirus pandemic took over the market, causing investors to flock to the safe haven of gold. The metal is up almost 50% from its lows during the pandemic in March 2020.
Since August 2020, gold has been on the decline with occasional gains as investors returned to USD trading, expecting economic stimulus and a new president in the White House to help revive the battered economy.