Markets are always on the move, gyrating in reflection of various market forces influenced by demand and supply.
Depending on investors’ portfolio allocation and risk profile, fluctuations in prices can mean profits, losses, or break-even.
How then would a risk-conscious investor make allocations in their portfolio? Should they add gold?
To answer this, an investor often actively searches for means on how to buy gold and add them to their portfolio.
Gold is time-tested, supported by institutions and governments. Besides, the precious metal has a deep market that’s several fold more liquid than Bitcoin and the cryptocurrencies market.
Benefits of Trading Gold and Market Movers
The question everyone is asking, therefore, is why gold? Why do seasoned investors and traders flock to the age-old store-of-value asset, incorporating them in their portfolio for diversification purposes?
Well, there are numerous reasons.
The outstanding one being gold’s track record. From time immemorial, the yellow metal continues to form a big part of the economy.
Gold is a store-of-value asset, meaning during times of turmoil, it cushions against losses resulting from systemic risks.
These risks can vary from inflation—and hyperinflation fears—to globally disruptive events such as the Coronavirus pandemic.
Unlike stocks, gold does well to prevent losses. Macroeconomic risk factors like inflation often reduce the purchasing power of fiat currencies, pushing prices higher, and making lives expensive.
Moreover, gold prices can be affected by an array of fundamental factors.
Besides inflation—as aforementioned, gold prices can also move and down depending on political situations. U.S. presidential elections often tend to affect gold prices.
Other economic factors include the state of employment, especially in the United States. As a world economic powerhouse, high unemployment rates trigger more spending, increasing inflation risks, forcing prices higher.
Also, the strength of the USD is a factor.
Depending on the monetary policy implemented by the FED, gold’s volatility can taper or diverge, affecting prices.
Gold as a Hedge and Portfolio Stabilizer
Beyond that, gold tends to be inversely proportional to other investments, especially during economic uncertainty.
As a result, gold serves well as a diversifier.
During this time, stocks can suffer. However, in response to changes in the equity market, capital flight to gold and other value preserving assets tend to push prices up, balancing out possible losses in any diversified portfolio.
If gold serves as a stabilizer, what percentage of gold should make up a diversified portfolio? This often lies in the risk appetite of the investor or trader and other secondary factors.
In this case, two routes can be taken.
The first road is allocating gold for pure profits while concurrently hedging against inflation by buying digital gold or gold ETFs.
The second is to hedge against inflation and earn profit from price movement by owning the metal. In this case, an investor can opt to buy gold jewelry, coins, and bars.
How to Buy Gold
Wealth advisors often recommend making gold form between five to 10 percent of your portfolio.
This is for risk-averse conservative traders. However, the percentage can be higher depending on the trader’s risk profile and existing economic conditions.
Traders can find gold exposure by buying gold CFDs—the cheapest and efficient way of investing in yellow metal.
CFDs are convenient because a trader can trade on leverage translating to larger lot sizes. Since CFDs track the underlying asset price without the trader owning the asset, gold CFDs are popular.
Furthermore, there is an option of trading gold ETFs eliminating the risks of paying fees to banks or owning the metal at home.
Conclusion
Adding gold to diversify a portfolio is an indispensable strategy traders can adopt and perfect.
The good news is, there are many options for gaining exposure to the yellow metal safely, cheaply, and conveniently.
All a trader ought to do is to carry out due diligence and use a regulated broker.
