Trading gold and precious metals is likely as old as humanity itself. Our ancestors knew its value also, since funerary artifacts made of gold that are 4000 years old have been found in Central and Eastern Europe. Trading gold, or gold as a currency has been used since 610 B.C.E.
The question is “why invest in gold” – the answer is simpler than you think, but you’ll have to read more, if I revealed it from the get go you would never finish the article would you?
USD and GBP is Down but XAU is up
The health of the global economy is generally gauged by the price of gold. This is because gold is usually inversely correlated with the stock and bond market. OK I see your confusion, let me explain – gold is considered a safe haven, so when the markets get hairy the smart run to gold. Most of these “smart” investors usually sell-off stocks and bonds to do so. Thus, a drop in the price of global bonds and stocks is usually concurrent with rise in the price of gold.
Also during periods of volatility as majors fluctuate, investors generally run to gold to protect their capital against these wild movements. For example, in the last few days the Dollar has been slipping against both its primary major counterparts: the Pound and the Euro. Gold on the other hand has been moving up since the beginning of the year. When I say investors “sell-off” don’t imagine old-school traders, ripping up call orders to sweep up gold. Most “smart” money will diversify, even though Warren Buffet thinks it’s a game of the ignorant – this means they have less money invested in more volatile types of instrument and more invested in safer instruments but with less yield. When markets get especially volatile investors will generally lower their exposure to more volatile instruments and increase their stake in safer assets.
Trading on Today’s Gold Rate
So, you’re ready to take the leap into the yellow lake…maybe that metaphor was a bit labored, but here’s the deal – you don’t deal in actual gold. Gold traders don’t have Scrooge McDuck vaults filled to the brim with gold coins. Most people trade on the price of gold. Why is that? Because to buy gold, you need to find someone credible and regulated (or you can go to Dubai and get some out of a vending machine even though they call it an ATM) to buy it from.
That’s the easy part though, if someone is looking to buy, there is definitely somebody selling it. The problem is selling, it’s much more difficult and risky – yes, most jewelry stores and pawn shops will readily purchase your gold, that’s because they will give a price much, much (just one more) much lower than market price which increases their profit margin. What you actually trade is the price of gold. These are called derivative financial products, CFD or futures. The speculative market usually estimates (or speculates thus the name) on where the price will go in the short or long-term future. With enough knowledge and experience, traders can “guesstimate” where the instruments price will go. So, if you want to trade gold or any other precious metals you better do your homework.