Gold trading is one of the oldest investment vehicles in the world. A precious metal is an important component of the global economy. Trade of gold in some form has existed across cultures for centuries, serving as a proxy for wealth and prosperity.
The metal's value extends far beyond its industrial uses since gold deposits are rare and hard to locate. It takes time and is costly to extract the metal from mines. As a consequence, any disruption in mining or significant increase in demand can drive gold prices up.
What are the reasons investors trade gold? In addition to its utility as a hedge against inflation, the precious metal provides a safe haven quality during political or economic instability, as well as portfolio diversification. It is not a guaranteed thing, but it has long been considered a general strategy at a high level.
What is gold trading?
It is the act of buying and selling gold with the aim of making money by predicting price movements. Since gold markets are regarded as highly volatile, traders attempt to gain returns by buying the commodity when prices are low and selling when prices are high, or by taking a short position when prices are expected to fall.
Traders need to take care when gold trading online in UAE due to its large price fluctuations and the wide range of instruments available, including futures and contracts for difference (CFDs).
The gold market can be extremely volatile, resulting in a high level of risk before you begin to trade gold. When you trade gold, you have a chance of turning a profit, but you also have a chance of losing money.
What moves gold prices?
It is important for you to understand the factors that affect the price of gold before you start trading gold. As a result, you can make better trading decisions and mitigate the risk of losses by utilizing this knowledge.
It is important to note that the factors that drive gold prices can vary at different times depending on the prevailing sentiment in the financial markets. Listed below are some of the most important factors that you should keep an eye on.
Inflation and interest rates
Gold spot prices are supported when inflation is high since the precious metal retains its value even if fiat currencies' purchasing power decreases.
Gold prices are strongly affected by monetary policy decisions made by the world's largest central banks, such as the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE). Gold prices are strongly affected by monetary policy decisions made by the world's largest central banks, such as the US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE).
US dollar value
Although the US dollar is no longer tied to the gold standard, gold prices tend to move in the opposite direction.
What is the reason for this? When the US dollar increases in value against other currencies, gold becomes more expensive for non-US dollar buyers, and demand declines. Conversely, a fall in the value of the dollar makes gold cheaper for overseas buyers, increasing demand.
Physical demand
Gold jewellery's demand can also affect the precious metal's price. During festivals and weddings, gold jewellery is often gifted in China and India, the world's two biggest gold buyers.
The demand for gold jewellery tends to increase during periods of strong economic growth. During the Covid-19 pandemic, consumers were unable to visit physical jewellers due to lockdowns.
In some electronics and industrial applications, gold is also used in small, but crucial, quantities.
Investment demand
It is estimated that the bulk of gold demand comes from the jewellery and gold trading investment markets rather than industrial uses, which consume less gold.
Gold is viewed as a safe haven asset that retains its value during times of economic or geopolitical uncertainty. As a result of the recession, stock market volatility, geopolitical tensions, natural disasters, and unexpected events such as the Coronavirus pandemic, investment demand can rise.
Physical gold bars and coins can be purchased by investors or gold-linked financial instruments, such as mutual funds and exchange-traded funds (ETFs). A World Gold Council study found that investment demand can change dramatically depending on market conditions, but generally averages about 1,000 tonnes per year.
Production
Gold prices are affected by mining output, if production at a mine is disrupted, the available supply is reduced. On the other hand, when a new mine is opened, the supply increases as a result.
As per the World Gold Council's data, about 3,500 tonnes of gold are mined annually, up from around 2,800 tonnes a decade ago. A further 1,100 tonnes are recovered from recycling each year.
As a result of its high gold production, China, Australia, Russia and the US dominated the gold market over the past decade. Historically, South Africa was also a major player but has recently lost its position from the ranking chart.
Gold price historical chart
Throughout history, gold has been one of the most volatile mediums of exchange in the world. The gold price, however, experienced periods of inactivity until the 1970s.
After gold standards were removed in 1971, the US dollar started a long uptrend. Since then, the gold price has fluctuated based on supply and demand dynamics and macroeconomic factors. The following chart shows the gold price history over the last 10 years:
The gold spot price reached a record high of $2,072.50 in August 2020, as investors sought safety in gold in the face of the Covid-19 pandemic and as central banks cut interest rates.
Based on the gold price graph, the precious metal approached that level again in March 2022 during Russia's invasion of Ukraine but then retreated as central banks raised interest rates aggressively to combat inflation.
Different ways to trade or invest in gold
Gold can be traded using a number of strategies, depending on your investment strategy and portfolio composition, from purchasing physical metal to using derivatives. The currency code for a gold spot is XAU, which represents the price of one troy ounce of gold and reflects previous currency values based on the gold standard.
