When the times are turbulent due to economic or political instability and the markets are volatile, traders opt for gold. Economic unrest has traditionally led the value of the precious metal to soar, as it is regarded by investors to be a safe haven asset. Such times also give rise to greater demand and interest for gold, which causes its value to increase even more. These market movements offer great trading opportunities that bring the potential for higher profits.
“Only gold grows more precious”, and as we analyze more in-depth, we will unravel the opportunities trading in gold possesses and how one can truly profit from it.
Why traders invest in gold?
Gold has been a highly favourable financial instrument among investors for a really long time. It is an independent commodity with high value that it is not associated to particular markets, individual countries or specific companies. That is why investors trade gold to offset the adversities that occur in the economic surroundings.
The gold market is a global over-the-counter market. The COMEX division of the New York Mercantile Exchange and the London Bullion Market Association are the two biggest market places for gold in the world. Like any other financial instrument, the price of gold is determined by supply and demand. People will often store supplies of gold during times of economic and political turmoil. Storing gold makes supply short and demand strong, thus pushing up the asset’s price.
What makes the gold market tick?
Conventionally, gold has commonly been regarded as a safe haven during periods of financial unrest. When there is any kind of market instability, markets experience a rise in gold, as it is regarded as the ideal hedging medium against these events. The perception behind this is that a precious metal with inherent value will maintain its value better than a financial instrument in less solid markets, such as currency or stocks, both of which can plummet on downbeat market data.
Investing in gold is also a great way to hedge against inflation. Gold has a negative correlation with interest rates, which means that as inflation rises and interest rates fall, the gold price is likely to keep rising, as it attracts traders who are unable to obtain returns from investing in other financial instruments.
What is more, high levels of government debt can negatively affect foreign exchange markets and thus make traders turn into gold. Trading gold acts as a hedge against currency devaluation, a feature which comes as central banks keep pushing quantitative easing policies to inject liquidity and reduce the levels of debt in countries.
Another factor that boosts demand for gold is heightened geopolitical risks in the world. When there is political unrest, like the recent events in Ukraine, Russia and Iraq, traders flock to the gold market in droves, as they fear that their returns could be damaged by political change or instability in a country and seek refuge in a safe asset to offset their loses.
How are gold prices formed?
The price of gold is measured by its weight. There are various ways of weight measurement in the precious metals markets. A troy ounce is the most common of them and equals about 31.10 grams. In terms of trading, if let’s say, the gold price is $624.89 then one ounce of gold is traded for $624.89.
Gold is priced in terms of U.S. dollars and it moves to the opposite direction to the currency. If the dollar gets weak, it will positively affect the demand for gold, as international investors will think that they are getting more because of the exchange rate, whereas if the dollar rises in value, gold prices decrease. For this reason, investors trade gold as a protection against the greenback to balance their profits and losses against it. In addition, as gold tends to maintain its purchasing power over time, traders may purchase gold to balance the effects of currency value changes.
In Forex, gold is a form of currency and a major driver of the market. The internationally accepted code for gold exchange rate is XAU. As gold is neutral, meaning that it is not related to any particular country, the increasing price of the asset affect trades in various currencies. Higher gold prices can be particularly significant to the currencies of major gold-producing countries. Canada is the world’s third largest producer of gold and Australia is the world’s third largest exporter of gold. Thus, if a trader believes that the gold price will keep rising, he can trade the Canadian or Australian dollar, as those currencies will most likely rise.
How to trade gold CFDs?
Traders trade gold through CFDs to get leveraged exposure to the asset. A CFD is a contract to buy or sell a particular amount of gold at a predetermined date. The profit and loss in such transaction is affected by the changes in the asset’s price. Gold CFDs offer traders the opportunity to speculate and diversify their trading portfolios, without physically owning the underlying gold volume, while enjoying the benefits as if they had.
Gold CFDs are very widely-traded and have high liquidity. The most popular way to trade CFD is over the spot gold price, which is the currently quoted price at which the asset can be purchased or sold at a specified time and place. To give you an example of trading the spot gold price, let’s assume that the gold market was very active lately and you believe that it will remain bullish, so you decide to open a trade. You get a quote for spot gold at 953.2 – 953.7. You buy 20 spot gold CFDs at 953.7. The tick size is 0.1, so if the asset moves from 953.7 to 954.7 it equals 10 ticks. The base currency of the spot gold is U.S. dollars. Over the next couple of days, you see that the gold price has increased even more and the quote is now 966.3 – 966.9. You make a decision to close your position and sell at 966.3.
The profit that you make is: (9663 – 9537) × 20 CFDs = $2,520
There are traders who believe that they can make profit from gold when the price is increasing, so they buy to push the price up and then sell to realise a profit. A number of traders sell gold when they feel that the price will decrease and buy it back later-on. There are others who think that it is better to buy gold when the asset’s price is falling. Their rationale is based on the fact that the price will rise again later on and that they will make bigger profit when this happens.
Whatever your trading strategy, whatever the reason you decide to trade gold, the simple fact is that traded wisely, gold can bring you some pretty hefty gains.
What should I invest and How do I invest
By Imogen Clarke, The Fry Group
With all the uncertainty that has arisen from 2020, with lockdown threatening businesses and the warning of a second wave, the topic of investments has taken on new meaning. Nowadays, more people are concerned with what makes for a good investment, or, if you’re a novice, how to best invest.
For instance, you might be unsure about the reliability of the company you’re looking to invest in, as well as the long-term prospects of your investment.
If you are unsure of your investments, then it is best to seek advice from financial experts like The Fry Group, who deal with tax, wealth and estate planning. They will see that you have a strong financial plan in place to help meet your objectives. They will develop a strategy that is built around your needs and asses any risks that could hinder your plans.
There are some things you’ll need to consider for your strategy; for instance, are you looking to make investments that are more of a risk and will take longer to come to fruition? Or, alternatively, are you wanting a faster approach that will result in a steady income? Whether or not you decide to play it safe all depends on your current financial situation and whether you have the means to take more of a risk. Do you have any other debts that take precedence over your future plans? Is your investment strategy realistic?
With the aid of a specialist – or investment manager – you can design an investment concept that works for you and your goals, and start to build a regular income from your investments. There are four main areas when it comes to assets (groups of investments) that you can consider:
Your investment manager will test the risks associated with your investment, and if it proves to be a positive investment choice, then you will be able to invest more over time.
So, how do you decide where to invest?
According to The Fry Group, ESG investing (Environmental, Social and Governance) is a good option for investors looking to support businesses that meet their similar ethics.
The main areas of ESG investing include:
- Environmental challenges (climate change, pollution, etc)
- Social issues (human rights, labour standards, child labour, etc)
- Governance considerations relating to company management
According to The Fry Group, “Many investors choose to consider ESG investing in order to ensure any investment decisions reflect personal beliefs and values. As a result, they choose to support companies who are making informed, responsible decisions which take into account their wider societal and global impact. In this way investors can achieve peace of mind that their investments are creating a positive effect.”
ESG investing is also more relevant now than ever, as more businesses are looking to present themselves as an environmentally conscious corporation that recognises the values of their consumers.
As The Fry Group puts it, “In the past, ESG investing has been seen as a niche investment approach, for a relatively small number of people with specific requirements. This has changed significantly in recent years, with a growing awareness of environmental issues such as climate change and an increasing understanding of social issues and human rights. As a result, many people are increasingly interested in reflecting their opinions and lifestyle choices through the way they invest.”
So, if you want your investments to pave the way for your personal values and reflect your own morals, then this is the route to go down. But how does it all work?
There are four areas of ESG investing:
- Responsible ownership and engagement: when companies are encouraged to make necessary improvements.
- Avoidance or negative screening: whereby businesses are ‘graded’ based on how ethical their business practices are and are avoided altogether if their methods are not approved.
- Positive screening strategies:when companies meet the ESG goals and are approved for investments.
- Impact investment strategies: the purpose of this is to use investment capital for positive social results such as renewable energy.
You will need to take into account your own personal objectives as well as the objectives that meet the ESG investment criteria. And, in terms of financial performance, ESG investing can be hugely beneficial. Those who opt for ESG investing perform a more in-depth analysis into long-term and future trends that affect industries, meaning that they are better prepared for changes in consumer values when they arise. And, with all the unpredictability that this year has offered us so far, isn’t it better to do the research and have all angles covered?
Investment Roundtable: Live with Jim Bianco
With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.
- Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
- Identify important intermarket relationships he is watching with respect to Global Equities
- Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.
Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.
Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election
By Rupert Thompson, Chief Investment Officer at Kingswood
Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.
At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.
The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March. As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.
These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.
The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term. A rise in the unemployment rate to 8% or so later this year still looks quite likely.
Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.
Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.
Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.
It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.
All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.
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