With its popularity and value holding strongly for years and ages, gold has a long history of being considered as a safe commodity. Many people and investors have been using gold as an important asset in portfolios for many years now.
Not only that, people are trading gold through CFD as well. A total of 7% of investors trade CFD, which corresponds to 1.5 million Brits, as found in recent research. From its use as jewelry and currency to gold trading and its spot in a ton of financial systems, gold has been and still is an important aspect of the global economy.
But why is gold appraised as a reliable and safe commodity? In this post, we are going to take a deeper look at why is gold traditionally considered a ‘safe’ commodity.
Why is gold traditionally a ‘safe’ commodity?
Its physical versatility and historical value have put gold in a sweet spot to survive bad and good financial times, often working to counter market fluctuations and uncertainty.
While gold prices increase or decrease as an act of response to events, and although it can be volatile in the short term (which might be desirable for day traders), the precious metal has always maintained its value over time or long term.
We can safely say that the sum of its properties, its relevance through history, and its value has made it a safe commodity.
There are many other reasons why gold is considered a safe commodity:
- It’s a highly liquid commodity
- Have no credit risk
- Is scarce
- Preserve its value over time
- Historically used to hedge inflation
- Used as a protection against deflation
- It’s called a ‘crisis commodity’ since gold maintains its price during geopolitical unpredictability.
- Constantly increasing in demand
- Used for portfolio diversification
- Used as a trading asset through CFD
The precious metal has been respected throughout history, from ancient times to modern days. People from all over the world, with different backgrounds and cultures, have been holding onto gold for several reasons like a rudimentary investment buying it physically, as a modern investment asset, and in recent years as a trading asset.
All of those aspects have been inviting people to invest in gold or trade it through CFD, while both aspects offer their own set of risks, differences, and benefits, understanding both is essential.
Investing in Gold or Trading it Through CFD
The differences between investing and trading are well-marked, as well as the risks or what it takes to do it.
Gold for both, investing and trading are highly accessible nowadays. It all goes down to preferences and disposition to learn (more on this later).
To trade gold through CFD is as easy as creating an account on the exchange you choose, and with a minimal amount of investment, you can start trading it.
Investing in gold can go two different routes: physical and non-physical. For physical investment, you’ll need a higher and fixed amount of money and store it yourself (with all the drawbacks of that) or let your bank store it. While for non-physical, you’ll need to take advantage of the gold receipts or based saving plans offered by institutions or banks.
Leverage and Margin
One of the most notable differences between both methods is, that trading lets you opt for margin trading, which lets you use a small amount of capital and trade it for a larger position. People tend to use it with the expectation of getting more money than they would get with their initial capital.
Of course, this comes with a set of drawbacks and risks, like losing a bigger portion if the trade fails.
While traditional investment doesn’t have this option, which means you would invest your money and expect a fixed amount of return.
Volatility is a huge deal, while most traders seek market volatility expecting a gain from market swings and care about it in the short term, most investors don’t pay attention to this aspect for the long term, since gold has proved to retain its value over time.
But gold volatility can represent a risk factor, since the price tends to fluctuate faster than other assets, making it hard to read or predict its direction.
It is not a secret that trading has gained popularity in recent years due to its income potential, and with margin or leverage this becomes exponential for the short run, but the risks too.
While investing in gold can be safer, its return is a lot smaller compared to trading, and can only be profitable in the long run.
Physical or Non-Physical
Investing in physical gold has been a popular option since ancient times, but it comes with its own set of differences, drawbacks, and risks you won’t find in the others mentioned before.
The main difference would be its storage as we mentioned before, storing your precious metal in a safe at your home or safety box at your bank is not completely safe, and usually, a monthly fee is required.
Another notable difference is that physical gold is not a passive income, owning it won’t generate income. While other assets may pay some kind of dividend or interest.