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Increased global uncertainty often leads to an increase in volatility.
Market volatility has, and continues to remain, increased in 2020, largely due to global resurgences in the COVID-19 pandemic.
Dependent on your trading or investing style, volatility can produce both opportunity and risk.
Precious metals are a popular investment choice across the board, from institutional investors (financial institutions) to trade-at-home retail participants.
Precious metals help form part of a balanced portfolio – diversification of assets is critical and represents the backbone of many investment strategies.
Four of the most popular precious metals are gold, silver, platinum and palladium. Interestingly, palladium has been a top-performing commodity for three successive years (2016 – 2019).
(Source: TradingView – XPD/USD weekly chart)
While bullion coins (silver coins/gold coins) and gold bars are aesthetically pleasing, investing in the metals market no longer involves storing physical precious metals in a safety deposit box or commercial storage facility. Fortunately, thanks to derivatives products, such as contracts for difference (CFDs), investing (or trading) in precious metals is straightforward. If you still choose to invest in the physical bullion market, however, such as bullion bars, do remember to take into account the jeweler’s mark-up and manufacturing costs. Sadly, there are also many scams involving rare metals so it pays to be extra cautious.
CFDs are leveraged trading products that mirror the price of underlying markets, representing an agreement, or contract, between buyers and sellers to exchange the difference between the opening and closing price. With metals derivatives you do not actually take ownership of physical metals, such as gold or silver. Despite their popularity and high liquidity, CFDs are still relatively new products, widely credited to Brian Keelan and Jon Wood in the 1990s.
Depending on your investing or trading style, CFDs can be considered a better option than exchange-traded funds or ETFs. For example, if, through independent research, you find the price of gold is likely to advance, gold CFDs may be products worth exploring. At FP Markets, we offer exposure to the most popular precious metals, an Australian-regulated, multi-award-winning broker.
Precious Metals: A Brighter Future?
When it comes to precious metals investing, or metals trading, determining the direction of the market can be established through independent research, via fundamental or technical-based methods.
Investing in precious metals through CFDs, as briefly highlighted above, does not entail buying any physical metal, be it gold or silver bullion, just the related CFDs. You will not be meeting bullion dealers or coin dealers or physically accumulating shiny South African Krugerrands. Therefore, do not take into account gold and silver’s appeal as collectibles in your decision-making process.
As for palladium, there is no denying its performance over the last few years. In terms of market value, ounce for ounce, though, it is already pricier than gold so it’s possibly overvalued at this point. With respect to gold, the spot price recently clocked all-time highs, with the possibility of fresh pinnacles in the coming months given the rise in global uncertainty. Do not take this statement at face value, however. Aim to educate yourself – ask the right questions.
Precious Metals Investment: Important Questions to Ask Before Considering Gold CFDs.
When considering gold CFDs as an investment or trading vehicle, you must recognise the dynamics behind the underlying asset.
(Source: TradingView – XAU/USD weekly chart)
- What is the current geopolitical situation? Gold is an excellent store of value; it is often the go-to investment (frequently referred to as a safe-haven asset) amidst geopolitical turmoil. Therefore, ensure you understand the current geopolitical situation. If the COVID-19 condition deteriorates, for example, as we have seen in recent weeks with cases surging in Europe and across the US, gold prices could benefit. Conversely, an improvement, or the release of a vaccine, is likely to weigh on gold as traders/investors seek riskier assets.
- What is the shape of the US dollar? Another factor to consider is the value of the US dollar. If the dollar falls, gold prices tend to rise. Conversely, if the dollar surges, gold prices may fall. This is due to gold prices in world markets quoted in US dollars. This helps explain the inverse relationship between the two. Consequently, you may need to investigate the shape (market price) of the US dollar, either through fundamental or technical analysis to help determine the direction of gold prices. With the United States election just wrapping up, crowning Joe Biden the next US President, investigating where he stands on international trade policy as well as fiscal and economic policies might also be an idea, all of which affects monetary policy and, by extension, the dollar.
- What is the position of central banks? Another question is the activities of central banks. If major central banks opt to raise the arrangement of gold in their international foreign reserve holdings, this could elevate the price of the metal. The opposite may have gold prices drop. Transactions conducted through central banks are enormous; if they choose to buy more gold, the volume and value of those transactions is typically sufficient to boost gold’s price.
- Inflation rate? It pays to keep an eye on the inflation rates and inflation expectations as gold prices are influenced by inflation. A high inflation rate tends to be perceived as threatening to the value of global currencies. Even if global markets crumble, gold retains its value. In short, when global inflation increases, gold prices usually rises alongside it. In fact, the effect of inflation on gold prices is so powerful, high inflation expectations alone can be enough to boost gold prices even though current inflation is low.
DISCLAIMER: The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives are complex instruments and can be high risk; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.