Gold has been used as an investment vehicle for centuries. In earlier times, it was used to display wealth and build tangible assets. 

Despite the introduction of numerous other investment vehicles like stocks, Forex, and shares, gold remains popular. That said, what exactly are the benefits of trading gold? And are there any downsides people aren’t discussing? Here’s a brief breakdown:

Pros of Trading Gold

Gold offers unique characteristics compared to traditional trading vehicles. Here are some pros of gold trading you should know: 

Hedge Against Inflation

Commodities, especially gold, are considered a safe haven for traders. When inflation soars and economic uncertainties trigger panic in traditional exchange markets, gold holds its position. During financial crises, gold acts as a hedge and preserves its purchasing power for decades. 

Take a look at it this way: Unlike fiat currencies, gold can’t be printed or produced from thin air. It is mined and thus has a limited supply. Fiat currencies can be devalued, but gold’s value depends on its supply and demand.

Numerous Ways to Trade

Buying and holding onto physical gold isn’t the only way to trade. Other methods include gold Exchange-Traded Funds (ETFs), gold Contracts for Difference (CFDs), and gold mining stocks. 

Gold ETFs give traders exposure to the market without owning underlying assets, whereas gold CFDs involve speculating on price movements. Gold mining, too, gives you indirect exposure. You can invest in companies that mine gold, with stock performance hinging on operational factors. 

High Liquidity

Gold has universal acceptance as a store of value. Moreover, since it can be bought and sold in various forms, it can be considered a highly liquid asset. Even in the traditional foreign exchange market, the XAU/USD pair is heavily traded. 

Above all, trading gold incurs low transaction costs. This can ensure some peace of mind for traders. 

Risks and Limitations of Trading Gold

Like any type of trading, gold trading comes with its fair share of risks and cons. Here are some examples:

Doesn’t Generate Income

Traditional trading vehicles, such as stocks and bonds, bring dividends and interest payments. On the flip side, with Forex, you can buy and sell positions to earn profits. This isn’t the case with gold. It doesn’t generate regular income. Instead, your income solely depends on the metal’s value.

The best thing you can do is diversify your portfolio. Allocate 5 to 10% of your total investment to gold.  

Lack of Control

This is pretty obvious. Gold traders have limited control over gold prices. Things like central bank policies, inflation, the U.S. dollar, and geopolitical events determine gold prices. That said, you can do market analysis to find the right time to invest and trade. 

Storage and Insurance Costs

This is applicable to those who invest and trade physical gold. Unlike other financial instruments that can be stored with digital brokers, physical gold requires specialised storage facilities and lockers. You also need to acquire insurance for protection. The storage and insurance costs can quickly add up.