Gold Trading Information
Several things should be kept in mind when trading or investing in gold. Gold preserves real purchasing power during unpredictable political situations or inflationary upswings. Returns on gold trading depend on the time scale. Long-term returns on gold are debatable. Trading requires tracking and anticipating uses (demand) for gold, and/or conditions in mining nations (supply). There are misconceptions about gold trading---that trading gold is a singularly "Wild West" endeavor more akin to gambling than to a learned skill.
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Store of Value
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Gold is a "store of value." It preserves wealth. Political instability, inflation or mandated currency transitions may render one currency close to or completely worthless. Gold does not have that issue, since gold is not "changed" by decree. Gold is also an inflation hedge. Inflation hedges preserve---and even increase---real purchasing power if value of the dollar goes down.
Returns
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Trading in gold can be very rewarding or futile, depending on whom you ask. Edward McQuarrie of the Leavey School of Business makes a case against gold investment. He says gold is a nonsensical investment. Since gold is a hedge against general instability, when survival would be paramount. "If you are going to buy gold, you have to buy a shotgun too," McQuarrie says.
On the other hand, gold has a consistently negative correlation to stock indexes. Buying gold during a stock boom can give impressive returns when an equity correction inevitably arrives.
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Applications and Price
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Electronics, jewelry and high-tech devices use gold. When trading gold, consider likely future demand for products using gold. A consumption-based prediction might be as follows: As more countries develop high-tech capability, electronics will be increasingly common. This would raise demand, and therefore, the price of gold. On the other hand, this same development increases odds that someone may discover or invent substitutes for gold. This would lower the price of gold. Price prediction is not an exact science.
Mining and Production
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Producers' instability or natural disasters can cause gold prices to spike. For example, Brazil is a prominent gold supplier. If war broke out there, gold prices would, temporarily at least, increase. Traders and investors often follow developments among producing nations. Production is not a constant. Additionally, as gold prices increase, mining and processing techniques that were unprofitable become worth the high selling price.
Misconceptions
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Allegedly, gold is an ultra-risky investment. Yes, gold trading does entail risk; but arguably, less than stock-trading risk. Shares can sustain a 100 percent loss if the underlying company goes out of business. On the other hand, gold will always possess above-zero value. Commodities are also perceived as risky because of market manipulation. This may be true, but such risk extends to stocks. Institutional traders (mutual funds, big banks, etc.) buy and sell in thousands, if not millions, of stock shares at a time. Wall Street pros are also privy to information and resources the typical investor does not have.
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