Those interested in gold trading will know that in late 2011 gold reached an all time high of nearly £1,900 per ounce. Since then it has decreased by 15% in value. Some traders are optimistic that gold will once more increase in value, whilst others believe that gold remains a bear market. Here we examine the pros and cons of gold trading to determine whether it is a sound idea:
Pros of gold trading:
- Central banks are large net owners of gold. This could be a long-term driver in the price of gold. If there were a large scale selling off of gold reserves, this would be both an indicator of crisis and a positive move for gold itself.
- In previous times, gold was always perceived as a safe haven of stability and so gold trading was participated in by many. For instance, during the financial crisis of 2008 gold increased in value.
- Supply of gold has not expanded a great deal, despite the market’s bullish nature for a long period. Some miners have had difficulties in finding new deposits. So if supply is tight the price should increase.
Cons of gold trading
- Gold had for many years been a popular investment, with easy access via ETFs such as iShares Gold Trust and GLD. However, easy access means the risk of redemptions increases, so unwinding could be severe. As a result, there are investors who may now avoid gold trading.
- Gold is seen as a hedge against inflation. However, the risk of inflation remains small due to slow global growth. This could impact on the rewards gold trading may bring.
- Gold is used mainly for jewellery and jewellery is under financial pressure, particularly in India where the import tax on gold has increased by 50%. In addition, gold has a negative-yield, as it does not produce anything and costs money for storage and insurance.
As we have seen, there are both advantages and disadvantages for gold trading. By researching all the pros and cons, you should be in a better position to decide whether gold trading is for you or not.
Risk warning: Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.