Investing in gold is a popular investment activity that has proven to be very valuable over the years. For many investors and institutions, investing in gold around times of financial instability can rip significant gains. And given the times we live in, one would think there’s no better time than now.

Whether one should invest in gold is largely a question of one’s personal preference. While in recent years the value of gold has seen extreme fluctuations, it was pretty profitable at one time. Truth be told, gold has become a speculative instrument with the rise of leveraged trading. Should we let this guide us to premature decisions? No!

Considering the factors at play at the decision time, anyone willing to accept the risk of investing in any form of gold, be it physical or via CFDs or ETFs, must weigh the pros and cons of adding gold into their investment portfolio or trading assets.

Why is gold a good investment?

First things first, for many individuals, gold is simply a hedge against inflation. Banks and institutions have been at it for decades. An individual can buy gold to protect purchasing power and ensure no loss of wealth as gold is not susceptible to inflation; cash is.

However, that is not the only reason that people invest in gold. Some buy gold to diversify their portfolio. As a safe haven, when the price of gold goes up, it is generally assumed that the market is risk-averse. People who chase opportunities based on increasing risk will buy stocks inversely to gold. As such, people who invest in gold may want to consider adding it to the portfolio to diversify risk. Geopolitical risk is the number one cause of gold prices moving up. Take the recent rise of prices, for example, as tensions between the US and Russia amidst Ukraine’s intent to join NATO have pushed gold higher.

Last but not least, some people will simply buy and sell gold for financial returns rather than protection. These people, the speculators and traders, will not care about the price of gold going up or down to gain. However, they will care about the direction of the price in the short term to make the correct trading decisions. The type of people who will buy gold to hold for the long-term, known as the investors, invest in the future of gold, and it’s fair to say they rarely care about short-term fluctuations.

Is now a good time?

World’s inflation running hot has been proven very hard to curb despite rhetoric for policy tightening floating in the air. One would argue that gold is more popular now given the supply chain issues caused by covid, microchip supply shortages, and on top of that, hot inflation. But the risk of deflation has also risen dramatically.

Currently, signs of deflation appear due to the rising inflation reducing goods and services demand and the decrease of the money supply from the end of quantitative easing and stimulus. On top of that, stocks have shown us what a debt-fuelled asset bubble can look like. Asset bubbles are a predecessor of financial crises.

Arguably, consumer inflation has been high in the US but weakening in China. Producer inflation has been keeping inflation concerns high, but they also started decelerating when looking at the last quarter. The problem? Commodities-infused inflation has already had its run, whereas manufacturing or food has never been the problem in China. It is essential to mention that China is the largest consumer of commodities due to its higher property sector. But demand has fallen, as seen looming from the Evergrande giant. Som how do we make sure we benefit from gold at all?

How to benefit from gold post-covid?

Investing in gold can be a bit risky if the path to gains is short rather than long-term, and even more now, one would think. However, when comparing the long-term to the short-term gold prices, one can quickly realise that gold produced virtually no returns for an extended period of around ten years. So, long-term investing might not be a good option right now, especially considering that we’re near the all-time high.

It is essential to repeat that the value of gold will vary over time and fluctuate in the short term. That’s because the price of gold and other forms of precious metals and commodities are directly or indirectly linked to the prices of oil and different types of energy, which in return are related to inflation. It is fair to say that the correlation with the stocks, the dollar, et cetera, has made gold more susceptible to risk-on/off movements. That said, going long in the short term will depend on risk sentiment: geopolitics and economics.

One can rip good rewards during tensions, indeed. But the one that can produce the most benefits will always be the one that can take advantage of risk-off and on sentiment, from tensions de-escalation, for example. So, to figure out the right moment to short-sell gold brings us back to learning to trade. Let out expert team help you. Join AmegaFX to gain access to the latest news and market moves affecting the prices of gold, oil, and the US dollar.

Trading CFDs comes with a high risk of losing money due to leverage, and may not be suitable for all investors.

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