Gold has long been considered one of the worthiest investments in the financial market, since it typically performs better than other financial instruments when the market encounters high levels of volatility, and therefore can provide traders with good returns during uncertain periods.
Gold is a mainstream asset and because of its intrinsic connection with the US dollar, when investing in this instrument, you will also be required to have an understanding of the forex market, as price movements of the dollar will have a direct impact on the value of gold. You can invest in gold and monitor the forex market on an online trading platform like Plus500, for example, to keep track of market fluctuations, and open and close positions accordingly.
In this article we will explore why gold is classed as the best investment and why you should consider adding it to your portfolio.
Diversifying your portfolio
Trading in one particular financial market is risky, since you could experience high volatility. One way in which you can reduce your exposure in the market, and subsequently the risk involved in investing, is by opening multiple positions in different areas within the various financial markets. Gold is a reliable asset to invest in when aiming to diversify your portfolio, because it fairs well in times of financial crisis and has historically outperformed other instruments during fiscal crashes.
Additionally, though gold is connected to the dollar, it is not directly affected by other financial instruments, like stocks, for example. In the case of a crash in the stock market, gold would not be impacted, meaning, should you have a position in both of these financial markets, only one area of your portfolio would be affected by the decline.
Gold’s hedging capabilities
Hedging is the process of opening an investment to balance out the effects of the losses that you may have made in a different investment. In other words, if you have an investment in stocks, which has been affected by negative price movements in the market, you could use gold to hedge, since it shouldn’t be affected by the same issues that caused stocks to depreciate.
Gold is also an effective hedge if you have a position in the forex market because during periods of high inflation, currencies can experience dramatic falls in value, whereas gold on the other hand can maintain its value when central banks increase their supply. Amazingly, gold can actually increase in value when inflation is high, especially if the dollar has depreciated, since gold is quoted in dollars, and in order to purchase it, an investor is required to sell their US dollar.
Deflation’s effect on gold
As previously mentioned, gold is a financial instrument that copes well when inflation levels are high, but it can also benefit significantly when deflation occurs. Deflation takes place when the economy is severely in debt. In fact, the levels of debt that it takes to place an economy into a state of deflation have not been experienced since the Great Depression, which took place in the 1930s. During the Great Depression, gold surged in value because in order to protect the value of their capital, people decided to convert their money into gold coins, because money was practically worthless.
Gold has long proven to be one of the best investments in the financial market because of the fact that its price is relatively stable, and is not as negatively impacted by financial crashes as other instruments. Of course, any exposure in the financial market can be risky, so it’s important that you do your research, understand fundamental analysis and employ an economic calendar, to plan ahead for events that could impact the market.