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Gold as an investment - part 2

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Gold as an investment - part 2

September 13, 2018

In the second part dedicated to gold as an investment, we continue with how traders can get exposure to the gold market. Buying shares in mining companies is one possibility.

The risk comes from exposure to a single company. And, because the mining process (the time span from the moment gold is identified until the or gets exploited) is so lengthy and costly, few companies have the power to do it.

On top of it, gold price fluctuations affect the profitability of a company. Not once, the price of gold jumped or tanked fifty percent in one year. A negative move is enough to stop any investment process and affects the bottom line in a company’s profitability.

Traders avoid exposure on one mining company via ETFs trading. Some ETF’s follow entire industries or economic sectors, and the same goes for the gold industry.

However, trading such an ETF bears more risks than the shares of a single company because of the unique conditions in each Exchange Traded Fund. For example, some trade at five times multiples, meaning for every one point move in the actual index, the amount moved in the trading account is five times bigger.

One more way to trade gold is to do it via a CFD contract. CFD stands for Contracts for Difference, and all brokers offer them these days. In a way, it is a paper gold contract that traders use to speculate on the price of gold.

Gold appears on the Forex dashboard as XAUUSD and depends mostly on the way the U.S. dollar moves. What matters here is to understand that the XAUUSD pair is mainly used as a speculation vehicle, rather than a long-term investment.

Gold in Bad Economic Times

As already mentioned, gold is a store of value. More precisely, it keeps value when things go wrong in an economy.

Because all governments have a fiat currency now, not backed by gold, the temptation to “play” with the value of money is big. When the government needs some more money, the printing presses are there to solve the problem.

Yet, there’s not a solution from an economic point of view. In fact, it leads to rampant inflation.

Of course, developed economies and capitalistic countries didn’t experience significant inflationary levels in the last years. But unfortunately, plenty of examples surround us.

Look at what happens in Venezuela. Hyper-inflation eats from people’s savings, and the logical step is to invest in physical assets.

Real estate is a solution. Precious metals, another, with gold on top of it.

But there’s another way to look at investing in gold than protection against governments debasing their currencies. The thing is that gold, even when it loses value, it loses less than the other financial vehicles.

History is full of the period of times when the stock market lost some thirty percent or more, while gold only lost a few percentages. While it did lose value, it handled the pressure quite well.

Supply and Demand

While gold is viewed as a commodity, there’s a big difference between gold and, say oil. For example, if OPEC (Organization of Petroleum Exporting Countries) decides to change the production levels, the price of oil adapts in an instant.

Whit gold the situation differs. Because of the relatively limited supply and production levels, the quantity of newly mined gold hardly matters in the amount of gold that already exists on the market.

In other words, a supply disruption barely moves gold prices. In fact, most of the times the market entirely ignores it.

As for demand, multiple factors weigh in. One would be demand from countries that value gold as a store of value.

Curious enough, these are countries that experienced less economic stability. For this reason, traders talk about the West and East attitude towards gold.

West, of course, refers to the United States, where the currency didn’t lose value in modern times. Hence, the population doesn’t feel the need to protect their assets by investing in gold.

On the other hand, the Eastern part of the world suffered from heightened inflationary levels. Not once, governments plundered people’s economies, and families lost fortunes virtually overnight.

Hence, the feeling remained through generations, and how best to keep your things safe than owning some gold?

It is no wonder gold plays a crucial role in Middle East civilization and India, for example. Supply and demand from these parts of the world influence the price of gold.

Is the Price of Gold Suppressed?

Not once, conspiration theories pointed to the price of gold as being manipulated. Governments, on the desire to acquire more and more gold, keep the price suppressed so that they buy at lower prices.

Nothing has been proved so far. However, one cannot stop wondering why humanity would go such lengths to own this curious yellow metal?

Why countries like China won’t disclose the gold it owns, or why even some European banks refuse to disclose the amount in their vaults?

Because of its weight, gold is difficult to maneuver. Or, to move from one part to another.

For this reason, when central banks sell the gold it has in vaults, the selling takes place only on paper. The gold never leaves the vaults.

Instead, just the new owner’s name differs.

In times of war, many countries shipped their gold to other parts of the world. The United States was the destination, with the United Kingdom and continental Europe being ravaged by war’s devastation.

As such, many governments decided to ship the gold, or the countries wealth, in other central banks’ custody, to avoid the plundering of it.

France, United Kingdom, and even Germany did this. They protected their gold by shipping it away to foreign countries.

Conclusion

Gold remains one of the most sophisticated investment vehicles. It stores value, and it offers stability in turbulent times.

For whatever the reasons, governments still go the extra mile to own gold. Recently, Germany repatriated its gold from the United States in what is known to be one of the most expansive missions in the last years. Yet, it didn’t matter as the gold now sits in Bundesbank’s vaults.

To some up, gold offers an alternative to fiat money. As the only form of payment that stood the test of time, gold remains the one precious metals everyone wants to own.



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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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