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Trading Gold CFDs

Where does gold get its value from?

The first thing to understand when trading or investing in gold is where it gets its value from.

Gold is a precious metal. It doesn’t occur in massive quantities naturally, unlike other metals like iron. There are limited global supplies. Gold also has many practical uses, especially in the world of electronics and technology. It’s very malleable too, and easy on the eye.

Importantly, gold also doesn’t corrode. If properly treated and physically stored, it should not rust or fade away.

Metal has held high value since the dawn of human civilisation. You only need to take a tour of a museum to see gold trinkets dating back thousands of years or take a trip to the Vatican or Versailles to see it worked finely into those places’ grandiose architecture.

In short, gold’s value stems from its cultural, practical, emotional, and financial worth.

All of these factors combine into making gold a strong store of value.

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What is a store of value and how does this apply to gold?

Simply put, a store of value is an asset that does not depreciate. Instead, it holds its value. All of the reasons listed above make gold a dependable value store.

That is not to say the price of gold does not move up or down. Several factors affect gold prices. We’ll look at those later. But, compared to other assets, gold and precious metals tend to stay valuable.

Worldwide demand for gold has quadrupled since the 1970s. Demand for the scarce metal is as high as it has ever been.

Some commentators think that cryptocurrency may become a good store of value. One of the key debates is comparing Bitcoin and gold as places to store wealth. However, despite the price of Bitcoin skyrocketing across 2021, cryptocurrencies are inherently much more volatile than gold or precious metals. The jury is still out, but at the time of writing, many investors and traders still prefer to store their money in gold.

When compared against something like foreign currency trading, also known as forex trading, gold is also seen as a slightly safer bet. For example, gold prices are not directly influenced by changes in monetary policy in the same way that a currency is.

When we speak of wealth stores, gold tends to take the form of gold bullion locked away in a vault, or in the form of jewellery. There are also historic gold coins, such as the South African Krugerrands, that act as gold value stores too.


What affects gold prices?

Gold is an in-demand asset like anything else. Its prices can move up or down. Numerous factors affect gold prices. These include:

  • Supply, demand, and new discoveries – Global gold supplies rise at a very small rate, roughly 1.6% per year. Demand is usually very high too, either as a wealth store or for practical purposes, which can help support prices. New gold deposit discoveries tend to be quite rare, but any new gold mining discoveries can drive prices too. Currently, mining accounts for about 75% of global gold supplies.
  • The US dollar – We spoke earlier about gold being less susceptible to monetary policy, but the global gold trade runs on the US dollar. The metal is priced in US dollars. Changes in the US dollar’s value can make gold less or more attractive to traders, depending if it moves up or down. A weaker dollar might present an advantage to traders looking to buy gold in other currencies, for example.
  • Interest rates – When interest rates are high, gold prices might fall. That’s because traders will look to other securities like stocks or fixed-income assets to make themselves money. The reverse is also true. When rates are low, the price of gold can rise as traders use it as a safe haven to store their wealth in times of economic uncertainty.
  • Global economics – This factor is basically an expansion of the way interest rates can affect gold price movements. Because of its status as a safe haven for storing wealth, gold prices can go higher with downturns in the global economy. Prices were up 13% at the start of the COVID-19 pandemic, for example.
  • Practical uses – Let’s not forget gold has more uses than simply just sitting there accruing wealth. From jewellery to engineering to electronics, there are many industries where gold is a central component. As such, when these businesses' goods are in high demand, usually in boom times due to their luxury nature, gold prices can rise higher.  


Trading vs investing: what’s the difference?

While they are related concepts, there are key distinctions between investing in gold and trading gold.

Investing is the act of buying gold and holding onto it in the hopes it appreciates in value. That would mean buying physical metal goods, such as bullion, jewellery, or coinage. You would buy gold directly from a specialised dealer, on an exchange, or from a trusted broker. This would likely be extremely expensive.

Trading, on the other hand, involves speculating on the price movements of gold. There are numerous ways to trade gold using different financial products.

These include spread betting, contracts for difference (CFDs), or trading gold exchange-traded funds (ETFs).

In trading, you do not physically own any gold.

Spread betting was actually invented to speculate on gold price movements. Here, you essentially bet on the price movements of gold. A long position means you think the price will go up. A short position means you think it will decline.

Contracts for difference represent a set number of units of gold, similar to if you were to buy gold as an investment. However, you don’t own any of the metal as stated above. Instead, you are trading on margin using leverage. That means you open a position for only a fraction of the trade’s total value.

Because you are trading on leverage, your potential profits can be amplified – but so can your losses. You are always at risk of capital loss in any form of trading. Please learn the risks and only commit to any capital if you can afford to take any potential losses.

Gold ETFs follow the same principle as CFD trading in that you are speculating on price movements. However, an ETF is a fund that groups together multiple assets into one financial instrument. That way, you can get exposure to an entire sector and multiple parts of the gold ecosystem, such as gold futures or stocks of companies involved in the metal’s production, from a single position.

The same risks apply to gold ETF trading as with other financial instruments. Always bear that in mind when trading.

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