Gold has become one of the most popular investment tools offering good returns for investors and traders. To be a successful gold trader, it is important to learn the unique characteristics of gold and understand the logic behind successful investment strategies.
Why invest in gold
Gold is more than a beautiful shiny metal that people like to show off. It is an attractive commodity.
There are different ways in which gold is traded. You could trade in gold options or exchange-traded funds, but these are all virtual. If you want the satisfaction of holding your own gold, then you should buy gold bullion in the form of bars ingots or coins.
The fundamental analysis applied to gold trading uses major macroeconomic factors and parameters and correlates them with the movement in the price of gold. By collecting and analyzing macroeconomic data, there are four distinct factors that can be used to decide whether you should invest in gold or not.
There is a positive correlation between gold and factors like –
- An unstable economy
- A decline in the value of the U.S dollar
- Low bank interest rates
The last time the world plunged into a devastating recession wasn’t 2008. The banking system collapsed and the economy looked bleak but it bounced back. There is a positive correlation between the gold price and the unusually high rate of inflation. Inflation becomes a dangerous factor when it rises beyond 6%.
Economic Crisis and Gold
The last three major economic crises happened in the late 1970s. Back the economic decline caused the price of gold to rise. The next major crisis happened in the 2008/2009 financial crisis, and now we are living through the 2020 crisis caused by the COVID-19 epidemic. During these crises gold thrived.
US Dollar Index and Gold
Gold is linked to the US Dollar because the price of gold is expressed in in U.S dollar. When the U.S dollar fluctuates so does the price of gold. A decline in the value of the currency affects other currencies as much as it does the price of gold.
Seasonality and Gold
Gold investors might also track gold through various seasons. For instance, the demand for gold is expected to rise during the Indian wedding season. This generally falls in the period between August and November. Watching trends like that can help you decide on the best time to buy or sell gold. Most dealers are all too aware of these trends and their pricing might reflect seasonality trends.
Analysts also use a strategy called the breakout strategy. It involves comparing the closing price for gold during a specific month to the price trend over a long period like 6-months. If the closing price has been high than what it has been over that 6-month period, there is a good chance that the gold price will be good in the short-term period. The best strategy to take is to wait it out, don’t rush to buy or sell until the price of gold stabilises. The best way to answer the question of whether you should buy or sell is, do it when the price is good for you.