Why Trade Precious Metals?

The following is a guest blog post:

Precious metals such as Gold and Silver have been highly prized since ancient times, as they were used as the raw materials for coins and jewelery. Today, they have wider ranges of use, from industry to dentistry, but their principal value is as tradable commodities.

There are 3 main reasons why traders choose precious metals: they hedge against global uncertainty, they have universal value, and they help to diversify a trading portfolio.

Many people opt to trade precious metals such as Gold, Silver, and Platinum through platforms like UFX.com. A CFDs broker online since 2007, which offers traders the opportunity to increase their market exposure through leverage and margin trading.

Gold has an inverse relationship with the U.S. Dollar, its price tending to rise when the greenback falls, and vice versa. For this reason, precious metals traders often focus on short-term strategies such as day trading. However, Gold, Silver, and Platinum may also be suitable for long-term trading positions.

Advantages of Trading Precious Metals

Precious metals traders usually take into account the supply and demand situation of the commodity they’re considering, since this has a direct bearing on its price evolution. In recent years, the rise of the middle class in Asian countries, especially China, has led to higher demand for these commodities. Meanwhile, on the supply side, new mining and extraction technologies have increased the availability of these metals, especially Gold, driving up its market value.

The price of precious metals can be volatile, making them excellent commodities to trade. They react strongly to the release of macroeconomic data indicating the strength or weakness of a national economy, such as GDP figures, inflation rates, consumption indexes, and housing market numbers.

The economic health of a country determines the local demand for precious metals. For instance, Gold is a highly sought-after commodity during stock market downturns, when uncertainty is high. This phenomenon is known as “flight-to-quality.” When an economy shows signs of weakness, investors often sell higher-risk assets and make safer investments instead.

Aside from market psychology and supply and demand, smart traders also pay close attention to fluctuations in the price of the U.S. Dollar. Precious metals are denominated in this currency, and it is therefore important that traders are aware of all factors that may influence the strength of the greenback, which will inevitably affect the prices of precious metals.

Trading precious metals can also diversify your investment portfolio and help reduce your overall level of risk. Opening positions on Gold, for example, can protect your portfolio against inflation and keep it balanced, especially when the value of the U.S. Dollar decreases.

4 thoughts on “Why Trade Precious Metals?

  1. Well closest I ever got to trading metals is when I invested in gold miners such as Newmont and Barrick gold. It was an awful experience given how much the stock price fluctuates based on gold price alone for these types of stocks.

    The thing I don’t like about commodity stocks is that there is not a whole lot management can do other than to keep the cost below commodity price and hope it stays above the cost. Also dividend is usually shaky for such stocks and it’s hard to predict what a commodity price is going to do long-term.

    I guess energy stocks are the same way, but there seem to be more choices in terms of investment options such as energy transportation and refiners. I own a few energy stocks but stay with the mega caps.

    • Hi MATM,

      Many of the well known stocks we buy and hold in our portfolios are tethered to commodity prices. As you mentioned precious metals (mining) and energy stocks are obvious but so are many classic consumer staples like HRL, for example. They are facing tough times because of low turkey prices. CALM rises and falls with egg prices. Personally, I like to hold the physical stuff. I have a small stash of gold and silver and buy on occasion. That’s the closest to “trading” precious metals for me. Thank you for commenting.

  2. Lately I have been considering buying gold and silver buillon. That way when the market crashes again I can sell the buillon and buy more dividend stocks at a very cheap price.

    What do you think of this strategy?

    • Hi MD,

      As I commented above, I also hold gold and silver bullion. I’m not a gold/silver bug by any means but do value owning and holding the physical stuff in addition to my stock portfolio. For me it’s part having a store of value for the long haul, part collecting and part fun. I’ve been buying since 2007 and add to my collection every now and then. Like I said, it’s fun and interesting to collect these items. As always, I appreciate your comment.

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