Gold is a precious metal that’s been highly valued by humans for centuries. Its unique physical properties (almost indestructible, yet highly malleable) mean it has a wide range of uses in everything from jewellery to medicine to electronics. However, for a long time, the precious metal has been used as currency.
But what makes gold so special? Why, for example, are Silver or Palladium not the most popular precious metal?
As well as its practical usefulness across so many sectors, it also comes down to the fact that gold is rare enough to avoid producers flooding the market and bringing down its value, yet abundant enough to keep the market liquid.
There’s also something much less quantifiable that sees us value gold so highly. Humans have an emotional and historical attraction to gold that spans countries and cultures – there’s just something about its colour and brightness that we can’t help but love!
As a trading commodity, gold is primarily traded over the counter (OTC) and on exchanges. London is the global centre for the OTC market, where market participants trade directly with each other. While this market is less regulated and has a high degree of flexibility, the counterparty risk is higher. Exchanges are regulated platforms and trading is centralised.
They usually offer a standardised contract, which will not suit every trader as it limits flexibility. Besides London, the other two major gold trading centres are New York City (COMEX) and Shanghai (Shanghai Gold Exchange). If you’re a new trader looking to trade gold, then this might be the time to start with the options below.
How is gold traded?
·CFD (Contract for Difference) – This is used for trading gold without buying any physical product. This is a highly leveraged product and is popular amongst speculators.
·Futures Contract – Primarily used for speculation, this is also a widely used product for hedging purposes. Gold futures are traded on a centralized exchange.
·ETF (Exchange Traded Fund) – Traditionally used by both speculators and investors as a cost-effective way to trade or invest in Gold.
Investing in gold is primarily done through the following methods:
-Buying physical gold coins
-Buying physical gold bars
-Buying mining stocks
-Buying ETFs
What is driving the gold price?
Geopolitical developments
Gold is traditionally seen as a safe haven that retains its intrinsic value. Its price tends to rise during times of geopolitical tensions when other commodities, such as oil or wheat, can be seen as riskier.
Inflation fears
During times when investors are worried about rising inflation, gold will generally appreciate, as holding cash becomes increasingly unattractive.
Monetary policy
Gold and the US Dollar have an inverse relationship. Therefore, expectations of rising interest rates in the US will boost the Dollar and put Gold under pressure. On the other side, if US rate expectations decrease, the US Dollar may decline while gold prices rally.
Physical supply/demand
Buying gold ETFs or trading gold CFDs and futures has become popular, but physical gold is still used as an investment (e.g. coins and bars) and for the production of jewellery. Demand for such products will have an influence on the gold price.
Gold outlook for 2022
The ongoing conflict between Russia and Ukraine led to a surge in gold prices in February. Since then, prices have been consolidating as rate hikes from central banks worldwide have caused some headwinds.
While a more aggressive rate hike cycle appears almost inevitable – particularly in the United States – there is still potential for gold to have strong performance in 2022.
Geopolitical tensions are rising and putting the global economy at risk. Even if Russia and Ukraine come to some sort of agreement, the effects of the war will be felt for a prolonged period of time. With geopolitical tensions unlikely to abate anytime soon, traders and investors will remain on the defensive, which will boost demand for safe havens such as gold.
Inflation is running at multi-decade highs in many major economies and is likely to remain well above the target level of central banks as rising commodity prices, supply-chain disruptions and a tight labour market are all having an impact.
Gold has always been a popular long-term hedge against inflation, and with inflation running at 5 to 8% in developed countries, demand is likely to remain strong.
While gold is facing some headwinds from central banks hiking rates more aggressively and a strong dollar, high inflation and increased geopolitical risks should be sufficient to push the price of the precious metal towards the $2500 level.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Gold is a precious metal that’s been highly valued by humans for centuries. Its unique physical properties (almost indestructible, yet highly malleable) mean it has a wide range of uses in everything from jewellery to medicine to electronics. However, for a long time, the precious metal has been used as currency.
But what makes gold so special? Why, for example, are Silver or Palladium not the most popular precious metal?
As well as its practical usefulness across so many sectors, it also comes down to the fact that gold is rare enough to avoid producers flooding the market and bringing down its value, yet abundant enough to keep the market liquid.
There’s also something much less quantifiable that sees us value gold so highly. Humans have an emotional and historical attraction to gold that spans countries and cultures – there’s just something about its colour and brightness that we can’t help but love!
As a trading commodity, gold is primarily traded over the counter (OTC) and on exchanges. London is the global centre for the OTC market, where market participants trade directly with each other. While this market is less regulated and has a high degree of flexibility, the counterparty risk is higher. Exchanges are regulated platforms and trading is centralised.
They usually offer a standardised contract, which will not suit every trader as it limits flexibility. Besides London, the other two major gold trading centres are New York City (COMEX) and Shanghai (Shanghai Gold Exchange). If you’re a new trader looking to trade gold, then this might be the time to start with the options below.
How is gold traded?
·CFD (Contract for Difference) – This is used for trading gold without buying any physical product. This is a highly leveraged product and is popular amongst speculators.
·Futures Contract – Primarily used for speculation, this is also a widely used product for hedging purposes. Gold futures are traded on a centralized exchange.
·ETF (Exchange Traded Fund) – Traditionally used by both speculators and investors as a cost-effective way to trade or invest in Gold.
Investing in gold is primarily done through the following methods:
-Buying physical gold coins
-Buying physical gold bars
-Buying mining stocks
-Buying ETFs
What is driving the gold price?
Geopolitical developments
Gold is traditionally seen as a safe haven that retains its intrinsic value. Its price tends to rise during times of geopolitical tensions when other commodities, such as oil or wheat, can be seen as riskier.
Inflation fears
During times when investors are worried about rising inflation, gold will generally appreciate, as holding cash becomes increasingly unattractive.
Monetary policy
Gold and the US Dollar have an inverse relationship. Therefore, expectations of rising interest rates in the US will boost the Dollar and put Gold under pressure. On the other side, if US rate expectations decrease, the US Dollar may decline while gold prices rally.
Physical supply/demand
Buying gold ETFs or trading gold CFDs and futures has become popular, but physical gold is still used as an investment (e.g. coins and bars) and for the production of jewellery. Demand for such products will have an influence on the gold price.
Gold outlook for 2022
The ongoing conflict between Russia and Ukraine led to a surge in gold prices in February. Since then, prices have been consolidating as rate hikes from central banks worldwide have caused some headwinds.
While a more aggressive rate hike cycle appears almost inevitable – particularly in the United States – there is still potential for gold to have strong performance in 2022.
Geopolitical tensions are rising and putting the global economy at risk. Even if Russia and Ukraine come to some sort of agreement, the effects of the war will be felt for a prolonged period of time. With geopolitical tensions unlikely to abate anytime soon, traders and investors will remain on the defensive, which will boost demand for safe havens such as gold.
Inflation is running at multi-decade highs in many major economies and is likely to remain well above the target level of central banks as rising commodity prices, supply-chain disruptions and a tight labour market are all having an impact.
Gold has always been a popular long-term hedge against inflation, and with inflation running at 5 to 8% in developed countries, demand is likely to remain strong.
While gold is facing some headwinds from central banks hiking rates more aggressively and a strong dollar, high inflation and increased geopolitical risks should be sufficient to push the price of the precious metal towards the $2500 level.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Source: https://www.financemagnates.com/thought-leadership/how-does-the-gold-trading-market-look-in-2022/