How to Trade or Invest in Gold

Why is Gold Considered a Valuable Metal?

Gold is one of the most popular and widely recognized metals, not only among investors and traders but also in a broader context. This popularity is due to two main factors:

1. Rarity: Gold is a relatively scarce metal compared to others. It is estimated to be present in the Earth's crust at about 4 grams per thousand tons of rock. Approximately two-thirds of the total estimated quantity has been extracted to date.

2. Natural Properties: Gold has distinctive industrial and natural properties. It is malleable, ductile, conductive to electricity and heat, and resistant to corrosion. It is also easy to process.

It is important to consider that the rarity we are discussing here is the relative scarcity of metals. Gold has been treated as a symbolic value, store of value, currency for exchange, and ornamental jewelry. Old pieces are even regarded as artifacts. Platinum, although also a precious metal and surpassing gold in value, is not used as widely due to its extreme rarity, making it difficult to use as currency or for trading. Silver shares many of gold's properties but is more abundant, resulting in a lower price. However, both metals hold the same degree of importance regarding value and use.

The relative rarity of a metal that can be turned into money or currency for exchange means it must be rare enough not to be accessible to everyone but available enough for some to acquire and use for trade. Gold has successfully achieved this balance.

Why Consider Trading or Investing in Gold?

The brief answer to this question is: because gold preserves value.

Gold's supply is not directly related to market demand or the amount of demand. As global gold reserves decline and mining becomes more difficult and costly, its value naturally rises due to rarity. In other words, the small quantities of gold extracted become economically insignificant compared to the existing supply, which helps maintain its value against global market fluctuations.

Thus, gold’s ability to retain value makes it a hedge against inflation. When living costs rise, gold tends to be priced in depreciated currency, increasing its price. As a commodity, inflation and rising prices also increase its price as purchasing power declines, which is why people turn to gold when there is fear or uncertainty about their local currency.

Compared to other financial assets, gold has proven to have an inverse relationship with them in recent years. In times of economic confidence, the appetite for risk increases, making investment in markets like stocks or bonds more attractive as they often provide higher returns than holding gold. Conversely, during recessions or times of uncertainty, investors’ risk appetite decreases, leading them to hold gold to preserve their investments until the downturn passes. Therefore, gold provides significant diversification in investment portfolios.

What Influences Gold Prices?

The price of gold is determined by a combination of factors, including:

• Supply and Demand: The fundamental determinant of any commodity's price is supply and demand. When a commodity is more available than needed, its price decreases. Conversely, if demand exceeds supply, its price increases. Gold, however, has a unique situation. Its supply does not change significantly enough to create substantial economic differences in supply and demand variables. The impact is more on demand, with gold being sought from various sources, including jewelry makers, investors, and central banks. Gold plays a vital role in global central bank reserves.
• Industrial Demand and Jewelry: As part of the supply and demand equation, according to the World Gold Council, demand for gold in jewelry accounts for about 50% of global gold demand. India, China, and the United States are among the largest consumers of gold for jewelry, making them major global jewelry markets. Additionally, 7.5% of demand is attributed to technology and electronics due to gold's industrial and physical properties. The metal is used in medical devices such as stents, semiconductor chips, and electronics like GPS units. Thus, consumer demand for electronics or jewelry significantly affects gold demand.

• Geopolitical Factors: Gold is often viewed as a safe investment during times of political or economic uncertainty. Any political disturbances, negotiations, news, or even rumors can influence gold prices. This can lead to higher gold prices during geopolitical tensions or economic crises, including ongoing issues like diseases and pandemics, as seen during the COVID-19 pandemic.

• U.S. Dollar Value and Economic Influences: Gold prices generally have an inverse relationship with the value of the U.S. dollar, as it is priced in dollars. All other factors being equal, a stronger U.S. dollar, supported by positive economic data, tends to keep gold prices lower by dampening movement. Conversely, a weaker dollar is likely to increase gold prices through heightened demand, as more gold can be purchased when the dollar is weaker.

Gold-to-U.S. Dollar Index chart for 2023 shows that gold prices have been inversely affected by U.S. dollar news and data, alongside global negative news supporting gold prices as a safe haven and a negative reaction to positive economic data supporting the U.S. dollar.

How Can One Invest in Gold?

Today, there are various methods through which investors can gain exposure to gold or invest in it as a financial asset. Not all methods involve owning gold as a metal or commodity, nor do they require large initial capital investments. Some of these methods include:

1. Physical Ownership ("Buying" Gold): The most common way to invest in gold is by purchasing gold bars or coins.

2. Gold as a Financial Asset in Exchanges: Given gold's value retention, it is considered a safe-haven asset in exchanges amid price fluctuations.

3. Gold Exchange-Traded Funds (ETFs): Investors looking for more liquidity and lower cost entry into the gold market can consider mutual funds and ETFs exposed to gold, such as GLD or SPDR Gold Shares, one of the oldest gold ETFs.

4. Gold Futures and Options Contracts: These derivatives, suited for experienced investors, offer the advantage of controlling trading risks. They include options on gold futures or ETF gold options.

5. Investing in Gold Mining or Exploration Companies: Investing in shares of gold mining or exploration companies is another method to gain exposure to gold.

Conclusion

From the perspective of financial markets and investment, gold is a highly liquid and volatile asset, making it suitable for trading on price fluctuations. On the other hand, it is a commodity capable of retaining value, making it a refuge for investors. Trading gold can be profitable if you know what you are doing and develop a system that suits you for identifying potential trading opportunities. However, remember that trading carries risks and can lead to losses. Always conduct thorough research, understand the market and its influences before trading, and never trade with money you cannot afford to lose.

In upcoming articles, we will delve deeper into how to trade gold, invest in it, and analyze its prices.