Gold will always be the ultimate instrument for hedging investments in dollars. This because the price of gold will rise whenever the price of the dollar falls. Financial market experts are of the opinion that in the coming years and decades, the potential for generating profits is much higher when you invest in gold rather than the traditional blue chip company stocks. According to them, these stocks are incapable of competing in the world market. You can invest in gold in many ways and position yourself to benefit from a bull run in the gold market. The aim of this article is to explain why online gold trading in any of the ways mentioned in the article makes sense and how you can position your portfolio to generate more profits.
The world economy might have come out of the gold standard, but the future growth is in gold and ultimately the yellow metal’s tangible value as the basis for real value, whether the central banks acknowledge or not, will not change. Historically, it has been like this and it will be so in the future as well. This is to say that we continue to be on a “gold standard” despite the popularity of fiat.
There are five ways in which you can involve in online gold trading. Based on your level of experience in the market and familiarity with these methods, you can choose one that suit your needs the best.
#1: Gold Bullion
Nothing is better than investing in bullion because it is the ultimate expression of pure value. Many civilizations have acknowledged the permanence of the value of gold. For instance, Egyptian civilizations have buried large amounts of gold along with dead pharaohs thinking that they would need it in their afterlife. Wars have been fought just for the purpose of looting stores of gold. This is because gold is real money and a government fiat cannot change or control its value. This is the underlying reason as to why economies decided to do away with the gold standard. All said and done, the value of gold value will change only on the basis of supply and demand and is impacted less by interest rate variations or inflation.
However, the big disadvantage of owning gold is that the spread between ask and bid prices is very wide when trading gold. Therefore, you cannot expect to earn profit quickly through online gold trading. This is because you will be buying gold at retail prices and selling at wholesale rates. As a result, a big jump in price is required even to break even.
However, gold should not be viewed as a speculative asset. It should be kept as a defensive asset for its value. As the value of dollar can fall any time, the best way to preserve the value of your portfolio is by investing in gold. The best ways in which you can own gold include minted coins: Canadian Maple Leafs, one-ounce South African Krugerrands or American Eagles.
#2: Exchange-traded Funds In Gold
Recently, there has been a spurt in demand for the exchange traded funds (ETFs) as they present a more interesting way of involving in online gold trading. An ETF is similar to a mutual fund that is traded as an ordinary stock in a stock exchange. The exact portfolio of the ETF is decided in advance and is not changed. For example, the two gold ETFs that are traded in the US use gold bullion as the only asset. These ETFs offer a practical way of holding gold as part of an investment portfolio.
#3: Gold Mutual Funds
If you do not like investing in physical gold, but do want some investment to be held in gold, you can consider investing in gold mutual funds. They hold portfolios in gold stocks such as the shares of mining companies like Newmont. Actually, Newmont is a senior gold stock, meaning it is a well-capitalized company and has been around for several years. The mining company also has a creditable track record. Newmont owns established mines that provide specified amounts of gold every year. For a number of investors, having such companies in their investment portfolios gives them a great deal of confidence.
#4: Junior Gold Stocks
Investing in junior gold stocks is more speculative in nature. This is because junior stocks often do not own productive mines. The potential for making profits may be higher when you involve in gold trading online through junior gold stocks, but the risk of loss is equally higher. Often capitalization of such companies is likely lower compared to that of senior gold stocks. Therefore, investing in junior gold stocks is best suited for investors whose have a broader risk tolerance.
#5: Options and Futures in Gold
If you are an experienced investor, gold options present you with an opportunity to speculate in the price movement of gold. You have the freedom to speculate on the movement of gold price in either direction. When you go for a call option, you are betting on a rise in the price of gold.
When buying a call option, the purchase price is fixed. If the price goes higher than that, meaning the greater the margin between the option price fixed by you and the current market price, you make more money. On the other hand, when you purchase a put option, your expectation is that the price of gold will fall.
Buying options is a risky proposition. More people lose money than make money. As much as 75 percent of all options purchased by investors expire worthless. Further, the complexity involved in dealing with the options market is high and you need to have experience and a clear understanding as to how the market works. In general, options are both good and bad.
Futures market is even more complex for many investors. Even options investors with a great deal of experience would agree that the risk involved is very high. Among the different ways available for you to invest in gold, futures trading is by far the most complex. The futures market presents you with an opportunity to make fortunes, but the risks of you incurring huge losses in a matter of a few minutes are also equally higher.