Many people around the world, including those who are unfamiliar with financial markets, consider purchasing gold to be a safe investment. Due to its unique properties, gold has always been regarded as an asset that retains its value. Different methods of trading gold have emerged as a result of technological advancements. In this article, we’ll go over the fundamentals of gold investing.
What is the best way to buy gold?
There are several common methods for purchasing gold. Because gold is usually associated with its physical form, it can be purchased as gold coins, bullion, or jewelry. This is the most traditional idea, but it has a number of drawbacks, including high transaction costs, high storage costs, and low liquidity. However, the world has changed dramatically in recent decades. Gold trading became incredibly simple thanks to capital account liberalization and new technology. Furthermore, the financial markets enabled investors to purchase gold for incredibly low fees, or even for no fees at all.
Trading Gold CFDs
Trading gold CFDs has many benefits – most notably low fees and the ability to use leverage. Since leveraged gold trading only requires a certain percentage of the total position, it is mostly associated with experienced gold traders or gold day trading due to the high level of risk involved. In addition, gold CFD trading brokers also offers investors the opportunity to open short positions, which can be particularly useful in various gold trading strategies. The best gold trading platforms are often associated with forex trading as well, so some people use terms like “gold forex” or “forex gold trading”, which is wrong by definition (FX or forex refers to currency trading). It doesn’t change the fact.
Exchange traded funds for gold have always been popular as they offer an interesting alternative way of accessing the gold commodity. Some say buying gold ETFs is a good thing. But how does that work? Investors may not own the physical gold, but they still get exposure to the commodity, as most standard ETFs (vanilla ETFs) hold a set number of gold bars for each ETF share issued. Consequently, ETFs track the value of gold and any change in the price of gold is reflected in the market price of the ETF. For beginners or people looking to buy gold for a long-term investment, this is the best way to invest in gold as the construction of ETFs is easy to understand.
Another way to invest in gold is to buy shares in gold mining companies. Here, investors get an indirect exposure to the gold market as gold producers are heavily dependent on the price of gold. The prospects of such companies tend to improve when the price of gold rises as gold miners’ sales and profits are expected to rise as well. As such, there is a significant positive correlation between gold prices and certain gold stocks. It’s worth noting that gold miners can also pay dividends, which is a huge benefit compared to investing directly in precious metals. This factor could be particularly crucial for long-term dividend investors and implies that that in some cases buying gold stocks might even be a better idea than buying gold. We covered the most important aspects of dividend investing in our article “Investing in Dividend Stocks “.
Best time to trade gold
Many market participants are wondering when is the best time to invest in gold. A common belief relates to gold as a “safe haven”. This means that it is considered a relatively safe asset during difficult times such as financial crises or recessions. It is no coincidence that central banks hold gold as a reserve asset, as is widely expected “that gold retains its value. This reasoning also affects the decisions of retail investors, therefore gold is often found in investors’ portfolios. We have the idea of investing in precious metals in our article entitled ” Investing during a recession ” mentioned.
That being said, gold could become particularly popular during times of high inflation. Since rising inflation usually makes people concerned about the shrinking value of their money, gold is likely to act as an inflation hedge. Although the link between gold prices and inflation is not as significant as it used to be (we haven’t seen elevated inflation in many years and quantitative easing programs have also had an impact on this phenomenon), buying gold in countries with relatively high inflation can be beneficial still be a smart move. Gold is also viewed as an asset class that could help in building a balanced portfolio. This idea could be particularly compelling for risk-averse investors,
Nevertheless, a connection between gold prices and US yields has emerged since the global financial crisis. When investors buy US Treasuries, US yields fall, which is positive for gold markets. On the other hand, if investors decide to sell US Treasuries, US yields rise, which has a negative impact on the price of gold. The latter occurred in early 2021, when rising US yields pushed gold prices significantly lower. The phenomenon could be related to rising inflation expectations, which in theory would require central banks to act accordingly (including higher interest rates).
Trading hours for gold
We have discussed various aspects of buying gold. What about trading hours for gold? While it shouldn’t really matter to long-term investors who have a multi-year time horizon, it could be especially important when it comes to day trading gold. There are generally two peak times of the day – the opening of European markets and the opening of US markets. The European peak occurs around 9:00 am. However, most of the activity in the gold market usually occurs after the US markets open – by some estimates, the volume may even be double that of Europe. The increased volatility lasts from around 2:00 p.m. to around 5:00 p.m. This period of time could prove to be the best time to trade gold.