Gold As An Alternative Investment

 

Hello there, this is tradingpedia.com and in this video we talk about gold or XAUUSD. Gold can be denominated in various currencies but usually it is in USD. It is offered by many brokers and gold recently made a new high, well above the $2,000. This was the previous top, then the market dipped lower, it consolidated for a long time before exploding to a new all-time high during the coronavirus crisis.

Why People Buy Gold?

Why is gold important and why would people buy gold and how they do it? Gold is viewed as an alternative investment and, as such, it has one big quality – to protect against inflation, basically a hedge against inflation. Inflation refers to the money losing value – the more money depreciates, the more it losses value. In order to avoid that, alternative investments offer protection, like gold.

Gold is the oldest form of money that exists. It is not really money as it differs from the fiat currency, but it is the only form that survived for thousand of years.

How to Buy Gold?

In 2020 gold can be bought in a physical aspect – bullion gold. You may buy it online and the seller will guard it in a vault. You may also buy or own shares of gold miners in order to gain exposure to the industry. If you don’t want to own physical gold or paper gold, you may buy shares in gold producing miners and you will gain exposure.

Another way is buying ETFs or Exchange Traded Funds. They track the gold sector and therefore you gain exposure to the sector. Or, when it comes to the currency market, you may simply trade the XAUUSD – the pair for gold. If you gold long, you buy gold, is you short, you reduce the exposure.

Portfolio

Imagine a portfolio. One can either trade gold from a speculative point of view or add it to a portfolio. Let’s assume that this is our portfolio and we buy shares, and this would be 50% of the portfolio. And then you diversify within the asset class, etc. But 5% of the portfolio is usually added to the portfolio because gold protects against inflation. If the price of gold jumped from $1,400 to $1,900, the USD depreciated. And it did, because the EURUSD rose from 1.08 to 1.20, GBPUSD and AUDUSD did the same, etc. So, while the USD lost value, gold increased. Therefore, by having exposure on gold, the impact of a lower USD on the portfolio is not detrimental.

Gold is only one alternative investment – many others exist, but gold is the most famous one. Therefore, to gain exposure on the gold, you may own bullion, shares of gold miners or ETFs, and the idea is to protect a portfolio. It is a bit of a controversy regarding how much gold to own, but always a bit of gold never hurts.

Why You Must Own Gold?

What is curious on the gold price is that everyone attributes the recent move higher to the coronavirus crisis. But gold on the monthly chart formed an inverted head and shoulders that consolidated for a long time before breaking higher one-and-a-half-years ago. Well, the coronavirus crisis came only in November-December in China, and in March it reached the Western world. But the actual breakout came almost a year earlier. So far, owning gold since 1999 paid. Inflation is nowhere to be seen in the developed world, but gold is usually owned in emerging markets. Think Turkey, Russia, Eastern Europe where inflation made victims throughout the years and the population does not trust the ability of the central bank to steam inflation.

Therefore, in order to protect your investment, you must own gold. In the Middle East gold is viewed as a protection against money debasing and a lot of people own physical gold like jewelries.

It is a fascinating market; it is one of the most important things to know in trading – how gold affects your portfolio and investment.

At this stage, keep in mind that gold is an alternative investment, it offers a hedge against inflation, and there are various ways to gain exposure on the gold market.

Thank you for being here. Bye, bye.