The value of gold
The price of gold can fluctuate depending on political, social and economic instability. Trading gold is sometimes referred to as a ‘safe haven’ by traders because, unlike some shares in the stock market, its price is not always affected by governmental decisions or inflated by interest rates. On the contrary, gold can act as a form of insurance, as investors might reallocate assets into the gold market at unstable times. This could increase the value of gold, since its demand might rise as traders attempt to use it as a stock hedge.
So, why do some traders invest in gold? The answer relates to gold hedging. Gold and other precious metals sometimes have a negative correlation with stocks and bonds, depending on the current stability of the economy. This reinforces the idea of precious metals as a safe haven for traders. When their share positions are declining in value, some traders decide to take a chance on gold trading to balance out their potential losses. This is known as hedging in the gold market, and it is a popular trading strategy. This way, traders are attempting to diversify their portfolio as they spread their bets across a range of markets, where the price of gold may increase in response to events that would typically cause the price of stocks and bonds to decrease.
Why not start trading gold with our demo account? Practising with virtual funds can help you to build a strong trading strategy before jumping deep into the gold market.