What is Gold? Exploring Gold as a Trader's Commodity

Understanding Gold: A Trader’s Guide to This Valued Commodity

Gold is among the most valued commodities globally, with a rich history in currency and jewelry and its status as a favored safe haven asset. In this comprehensive article, we explore gold’s uses, the history of its market, how it functions, and the factors influencing its prices.

Main Talking Points

1. What is gold and what is it used for?

2. What affects gold prices?

3. How can gold be traded?

What is Gold and What is it Used For?

Gold, a precious metal known for its vibrant colour, malleability, and relative scarcity, has been coveted throughout history. Its industrial applications span electronics and computing, while its popularity endures in jewelry manufacturing. Historically, gold has also been used as a monetary instrument and a safe haven asset, retaining or increasing its value during market turbulence.

History of Gold as an Asset Class

For millennia, gold has held a high premium among humans. It served as the currency for many of history’s most famed civilizations, such as Ancient Egypt and Rome. More recently, from the late 19th century until World War One, currencies were anchored to a specific amount of gold. Post-World War Two, the world’s largest economies operated within a financial system based on a set gold price tied to the US Dollar until 1971 when the US ceased aligning its dollar with the commodity. Although gold no longer functions as official currency, its price remains highly influential in financial markets and global economies.

What Affects Gold Prices?

Several factors influence gold prices, including stability, supply and demand, central bank exposure, and volumes traded through ETFs.

Stability

Gold is considered a secure asset, often rising in value during times of turmoil as governments and investors use it as a hedge against uncertainty. Conversely, gold prices typically drop during stable times when riskier yet potentially more profitable investments become more viable.

Supply and Demand

Like most assets, gold’s price is driven by supply and demand dynamics. Increased demand for jewelry-making or manufacturing medical, industrial, and technological products pushes gold prices up, assuming constant supply. Conversely, weakening demand typically lowers its value.

Central Banks

Central banks in developed nations, particularly in Europe and North America, control substantial gold reserves and wield significant pricing power in global markets. Sudden changes in central banks’ gold exposure can magnify effects on gold prices. Therefore, central banks rely on an unofficial commitment to avoid large-scale gold sales that could destabilize markets.

ETFs

While ETFs generally mirror rather than influence gold prices, many large ETFs hold significant amounts of physical gold. The inflows and outflows of these ETFs can impact gold prices by altering physical supply and demand in the market.

How Gold Affects Currencies

Gold’s correlation with the US Dollar is a principal factor in its relationship with currencies. An increase in USD value makes gold more expensive for other nations, reducing demand and causing gold prices to fall. Conversely, when the Dollar loses value, investors turn to gold as a safe-haven alternative, driving prices up. Additionally, nations that export gold or have gold reserves see their currencies strengthen with rising gold prices, boosting the value of total exports.

How Can Gold Be Traded?

Gold can be traded in various ways:

1. Physical Asset: Purchasing gold in the form of bars or coins.

2. Futures and Options: Trading gold in the commodities market.

3. Exchange Traded Funds (ETFs): Investing in funds that hold physical gold.

Reasons to Trade Gold

Traders might consider trading gold for several reasons:

As a Safe Haven: Gold tends to hold or appreciate its value during economic turbulence.

Hedge Against a Weak US Dollar: Gold can serve as a hedge against inflation.

Portfolio Diversification: Including gold helps maintain a diverse portfolio of commodities, stocks, bonds, etc.

Further Reading on Gold and Commodities

Stay updated with gold market projections by downloading our free quarterly Gold Forecast. Also, read our guide on trading the gold-silver ratio for insights on comparing gold’s performance with silver. For those weighing gold against cryptocurrencies, our Bitcoin vs. Gold article offers valuable perspectives.