Why is gold considered the go-to investment for traders?

Gold has proven itself as a worthy investment for traders, countless times and could be an advantageous addition to your trading portfolio. As a mainstream asset, it is directly affected by many factors, including events that take place in the economic calendar, as well as unforeseeable circumstances, such as a financial crisis, for example. Gold also has an intrinsic relationship with the US dollar (USD) and so is an important aspect to consider when investing in the asset and forex trading online.

If you’re looking to open an investment, then gold deserves some consideration. Not only does it perform well during times of financial uncertainty, when the market is experiencing high levels of volatility, it can also yield competitive returns. For more reasons as to why gold is a go-to investment for traders, read on.

Effective investment hedge

When inflation rises, or there is a severe shift in the economy, driven by macroeconomic factors, then a currency can significantly fall in value. Because of this, investment in an asset, like gold bullion, that typically maintains its value when it’s predicted that central banks will increase their monetary supply, is strategic.

Typically, at times when inflation is high, gold can increase in value, particularly when the dollar is experiencing a decline. This is because the gold prices worldwide are quoted in dollars, therefore, a weaker dollar will subsequently lower gold prices. Equally, in order to purchase gold, investors must sell their US dollar, driving its price lower as a result.

Gold weathers the storms

Markets are dramatically affected by macroeconomic factors, like a rising unemployment rate or a pandemic, which can cause a financial crisis. During these periods of uncertainty, gold has historically performed well and those who have held an investment in the asset during a fiscal crash have been able to effectively protect their capital.

As the world is currently experiencing the economic effects of a global pandemic, we have been provided with an insight into the resilience of gold during a period of extreme uncertainty. In fact, the asset has reached all-time highs, driven by a surge of investors buying Exchange Traded Funds (ETFs) backed by gold in 2020, adding 877 tonnes of gold to global holdings. Gold prices hit record-breaking levels of $2,067.15 in August 2020, proving that the asset can well and truly thrive at a time when other assets will deplete. 

Creating a diverse portfolio

Having a diverse financial portfolio is beneficial, as opening positions in multiple investments can allow you to limit your exposure in the market, helping to reduce your portfolio’s volatility and reduce the risk of losses. Gold is a worthy investment when diversifying your portfolio because it isn’t directly connected to a range of financial instruments, including stocks.

This means that when stocks experience a crash, gold typically would not be affected by the same factors that caused this decline. Investing in gold, along with stocks, or another financial instrument that does not correspond directly with the asset, will reduce the risk of losing capital on your investments. 

Gold and deflation

Deflation occurs when the economy suffers from the effects of heavy debt, the likes of which have not occurred since the 1930s, when the world was submerged into the Great Depression. At this time, gold experienced an overwhelming increase in value, as individuals chose to protect their capital by converting it into gold coins. 

Gold is a worthy investment and can be considered a go-to for any smart investor who wants to diversify their portfolio. Before investing in any asset on the financial market, it is crucial that you do your research and access information that is readily available online, to fully understand the risks involved and the best strategy to follow.