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A Beginner’s Guide for Trading Gold and Precious Metals

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Since gold remains one of the most popular precious metals in the world, there continues to be a wide audience – online and offline – willing to invest or trade on its price. Even though some media outlets have recently highlighted that some investors favor crypto over gold, the stable price and function as a proper hedge against fiat devaluation continue to be a factor in favor of precious metals, in the long run.

Physical gold and gold derivatives

One of the first things people need to differentiate is physical gold from derivatives tracking its price. When buying physical gold, people are purchasing an asset, expecting to appreciate in value over time.

Gold derivatives like CFDs, on the other hand, are affordable trading instruments available for both institutional and retail traders, enabling buying and short-selling of the underlying asset (gold). This creates an opportunity to take advantage of price movements without owning gold. CFD trading continues to be one of the ways retail traders choose to get involved in the financial markets, also when it comes to commodities trading, since valued brokers offer account types suited for trading these assets, such as a unique gold trading account.

Gold vs. other traditional assets

Looking at the past couple of years, gold volatility has been relatively reduced, when compared to other popular assets. Stock markets have been in the spotlight as many major indices reached new all-time highs, despite a temporary setback generated by the pandemic.

At the same time, gold can serve as a viable portfolio diversification tool, since it is not highly correlated to stocks. Until 1971, when the Bretton Woods financial system collapsed, gold was at the center of global finance, as the US Dollar’s value was pegged to gold, and all other currencies were pegged to the USD.

What affects the price of gold?

The importance of the US Dollar when analyzing gold stands out, as most CFD traders use the value of gold in Dollars as a reference. Fluctuations in the global reserve currency can influence gold developments.

US Treasury yields are important as well, since rising rates are generally a negative factor for gold. Central banks buying or selling large amounts and other variables that can affect the demand/supply balance can be price-moving factors as well.

Silver – a cheaper alternative?

Platinum or palladium are also precious metals that can be traded online, yet silver ranks second to gold in terms of retail interest. With a smaller market value per ounce and not closely correlated to gold, silver is also an alternative for taking advantage of price movements in this sector. Some analysts view silver price developments as a leading indicator for where gold is headed.

Conclusion

Retail traders viewing gold CFD trading as an option to ensure greater diversification should know that this asset can be traded using the same tools and techniques as with other financial instruments. Although historically gold has been moving up due to the diminishing purchasing power of fiat currencies, it does not do so in a straight line. Both bullish and bearish markets occur, which creates a proper environment for speculation.

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