Understand the Gold Trade Before You Invest
Understanding how the gold trade works is the crucial first step to investing in gold. Before you can begin investing you need to know how the trade works before you learn how to invest in gold. Until recently gold was a standard mark for the changing currencies and their values. The gold standard was used in banks and systems across the world, but this ended in 1971 when the US decided to remove the gold standard from influencing its dollar. The system moved to a fiat currency, which essentially makes the US dollar a legal tender that is not supported by a physical material such as gold.
Gold is a commodity that relies on supply and demand to determine its worth, similar to other currencies. Gold differs from other currencies, however, because its consumption plays a very minimal role in its value. Simply put, no matter how much or little the usage is in the wider social market, the value of this commodity will not be influenced. The role of gold on the British economy dates back to 1694 when the Bank of England established the gold standard system, whereby the currency exchange rate was fixed according to gold. After World War I most countries, including the UK, gave up this system and produced the system used today.
Choosing the Most Beneficial Method of Investing
When learning how to invest in gold, it’s good to know that it offers various methods and both physical and abstract forms whereby you can own gold. These forms include:
- Physical bars, coins and jewellery
- Gold exchange traded funds (ETFs) and exchange traded commodities (ETCs)
- Gold accounts in bullion banks
- Mutual funds in gold mining stocks
The ownership options boil down to which you would prefer to pursue depend on personal decisions and your financial situation and should be decided before you start investing. The first option is owning physical forms of gold, such as slabs or bars and coins (also known as bullion) like the South African Krugerrands. The benefit of owning physical gold is that it is a tangible and scarce form of possessing the commodity, especially in the form of privately owned jewellery. This method is usually done through a bullion bank, which is useful as it is separate from the national banking system. Many of these banks are available in the UK and are highly reputable.
The alternative to physical gold is the method of having gold as ETFs and ETCs or mutual funds in mining stocks, which is mostly conducted on online platforms. This method allows your gold stocks to trade on the stock market as any other currency would, making it a wise option for an investment portfolio.
Top 3 ETF Broker Comparison
Dividend-paying Growth Asset and Diversifying Investment
Investing in gold can serve two major purposes: a dividend-paying growth asset and a diversifying investment. Gold as a dividend-paying asset is more appealing to growth investors as it consists of owning gold stocks and offers larger gains from smaller decreases in the price of gold. This allows investors to obtain a high return on investment (ROI). The performance of the dividend of a stock usually reveals how well the sector is fairing. Although this investment method is highly beneficial, an investor should monitor each company’s payment history and dividend pay-out ratio before investing with that company for dividend-paying purposes.
Gold as a diversifying investment is different from a dividend-paying growth asset in the sense that it pays close attention to risk management. Because gold is not dependent on factors like inflation, it is a wise way to invest. The benefits of this method are directed at the fact that a well compiled investment portfolio will yield higher returns, with the included advantage of minimal risk. While both of these methods have great potential for high returns, the choice between the two will be unique to each investor and their aims for investing in gold, which is what makes the trade even more spectacular.
Knowing When it’s the Best Time for Strategic Investments
The advantage of investing in gold rather than or alongside other commodities is the fact that gold is highly valuable during financial crises. During times of economic uncertainty gold is a save fall-back in any economy. The trading strategies used in gold investments are therefore a great deal simpler and more secure. Throughout history, economies that possessed a large gold reserve were able to recover better after an economic fall. Gold can be used as a hedge against rising inflation because as the US dollar – and equally affected currencies – decline, the value of gold increases.
As a currency’s value decreases, investors look towards solid commodities that are not directly linked to the abstract currencies and have a stable value, such as gold. The value of gold is priced in US dollars. Thus, as the dollar falls, gold becomes of more value. The decreasing value of US dollars also makes gold investments cheaper, whereby investors can obtain gold for a lower price and still retain its value. The importance of understanding these strategies of how to invest in gold at the right time, and when it is most valuable, are essential for successful gold investments. But even if you invest in gold at an unplanned time the benefits are relevant at all times.
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The Gold Quadrant and its Benefits for British Investors
One of the greatest tricks that many amateur investors ignore, is being aware that gold investments rely largely on currencies. Because the price of gold is initially set in US dollars and then converted to the relevant currency, the performance of your currency dictates much of gold’s value. For British investors this issue can be resolved with a strategic method of the gold quadrant that provides four possible results in the relationship between US dollars and the pound:
- Quadrant 1: The pound goes up and the price of gold goes up so you profit on the gold price but lose money on the exchange rate.
- Quadrant 2: The pound goes down and the price of gold goes up, allowing you to profit from the gold and the exchange rate.
- Quadrant 3: The pound goes up and the price of gold goes down so you lose money on the gold and on the exchange rate.
- Quadrant 4: The pound goes down and the price of gold goes down so you lose money on the gold price but make money off the exchange rate.
These four quadrants lay out the effect of the changing prices of gold and the pound and how it will influence your investments. All changes to the price of gold and the pound are covered by this quadrant concept, making it simpler than ever to make educated decisions when trading.
Common Mistakes to Avoid
Before becoming anxious over possible mistakes you may make or all the concepts you have yet to learn, you need to realise that the mistakes you make can benefit your trades later on, if you take the right approach. Rather than fear mistakes, focus on the learning opportunities they provide. Many mistakes are also avoidable once you are able to recognise them. There are four common mistakes that new gold investors struggle with:
- Not having a clear trading plan
- Poor preparation and research of strategies
- Having unrealistic expectations for the trade
- Not tracking your trades
There are multiple other mistakes that traders make, such as treating the trade as a hobby or giving in to the pressure of others. But simply being aware of potential mistakes makes it a great deal easier to avoid them. Many books have been written about both the common and less common mistakes traders make when investing in gold, so there are ample resources from which you can learn. The basic idea behind avoiding most mistakes is thorough planning and research. By setting clear goals and strategies for yourself your actions will always have direction. Sufficient research and analysis on the various strategies and methods will ensure that your plans are well-thought-out in the event of changes and disasters.
Conducting Broker Comparisons
When trading through a broker you will want to conduct a detailed analysis of your options and do a broker comparison. This may be between multiple brokers at first until you have narrowed your search down to two or three. When comparing brokers your focus should be on the spreads, the minimum deposit (if you’re starting small), the variety of platform options, the different account types, funding methods and customer support. With regard to spreads you are looking for the options of fixed and variable.
An average minimum deposit is usually £100 to open an account. A wide variety of platforms allows you to easily select the best one for gold investments. A range of account types is also good depending on the level you want to trade on and what your personal goals are. Funding methods such as PayPal, credit card and bank transfers, are convenient and provide more options for you as the trader. The best customer support a broker can provide includes live chats, email correspondence and phone calls. While it might be challenging to find a broker that meets all of these requirements, a good balance will reflect the nature of the broker and guide you in your decision. It is essential to weigh the pros and cons when choosing a broker because, although you are not limited to that broker forever, you want to start your trading venture on the solid ground of a quality broker.
An Overall View of Gold Investments
Trading in gold can open business and financial opportunities for you that you might never have thought possible. The benefits of trading in gold are astounding thanks to its separation from the standard currencies and the various forms in which it comes. Gold as an investment allows all types of traders to take into consideration your personal style and traits in your trading and make your portfolio unique to what you want. As a UK trader it is especially beneficial for you to invest in gold, as the pound is on your side in the exchanges. Regardless of economic strife, gold is a commodity with a great tenacity to hold onto a reasonable value.
By learning the strategies and techniques and doing as much research as possible, you will find that what may have seemed like a hobby has the potential to become a career. The best ways to guarantee your success are a well-planned trading goal, a good sense of the market and making wise decisions for your trading future. Amateur, mildly clued-up or expert, as a trader investing in gold your investments just became as valuable as this precious metal itself.