Pros and Cons of Gold Trading

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Looking to invest in gold but unsure if it’s the right move? Here’s a detailed guide explaining the pros and cons of trading gold so you can make an informed decision:

Pros of Gold Trading

Gold remains one of the most popular assets traded worldwide by investors, commercial banks, and hedge funds. Here are four reasons gold trading is worth it:

Hedge Against Inflation

When inflation increases, the value of fiat money suffers a significant blow. Gold, on the other hand, has historically risen in price during inflationary periods and economic downturns. For instance, at the height of the financial crisis between 2008 and 2012, the price of gold increased by more than 100%. This is why gold is considered a hedge against inflation. 

Numerous Ways to Invest

Purchasing physical gold in the form of coins, bars, and jewellery is pretty common. But when it comes to gold trading, you have numerous investment vehicles. This includes gold Exchange-Traded Funds (ETFs), gold mining stocks, gold futures, and gold mutual funds.

High Liquidity

As mentioned above, gold can be bought and sold in various forms. In the traditional foreign exchange market, the XAU/USD pair is heavily traded. Gold, as a highly liquid asset, creates opportunities for short-term trades. 

Portfolio Diversification

Gold trading is one of the most profitable ways to diversify your portfolio. In case of economic or political downturns, a diversified portfolio is more likely to protect your wealth. Adding gold to your portfolio can reduce overall risk due to its negative correlation to other commonly traded assets.

Cons of Gold Trading

Like any financial activity, gold trading comes with its own set of cons. Here are some examples:

No Regular Income

Unlike stocks or bonds, gold doesn’t generate any income as it is a non-yielding asset. In simple terms, traders can’t earn passive income by simply holding gold; they only profit if the prices go up. Lack of income can be a con for retirees and professional investors looking to build a steady passive income stream. You might also feel stuck after investing too much money in gold.

To avoid this, allocate only 5% to 10% of your overall investment. Moreover, consider your long-term financial goals. If you’re approaching retirement, you might want to compare gold and stocks to choose the more profitable option. 

Prone to Volatility

While gold is seen as a safe haven, its value can fluctuate sharply due to a number of factors. This includes inflation rates, supply and demand, central bank demands, and market sentiment. Sudden price swings make gold trading risky, especially for new traders unfamiliar with the technicalities. 

Complexity

The precious metal asset class is challenging to get hold of. Traders have to keep an eye on numerous economic and geopolitical events. Moreover, choosing the right investment vehicle can be difficult. To avoid losses, make sure you familiarise yourself with all the technical aspects and choose the right broker. 

The Bottom Line

Gold trading can be a profitable venture if you’re committed to understanding the market dynamics and making risk management moves. 

About Micah Drews

After playing volleyball at an international level for several years, I now work out and write for Volleyball Blaze. Creating unique and insightful perspectives through my experience and knowledge is one of my top priorities.

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