Is gold a good investment

Gold is a financial instrument that appears in many investors’ portfolios, but the question is — is it a good investment? 

Before we talk about gold specifically, let’s explore what differentiates a ‘good’ investment from a ‘bad’ one. Of course, one of the most obvious factors that constitutes a good investment is its ability to provide you with a profit. It’s also extremely important to consider the level of risk that you will encounter in each of your investments. 

All investments are risky — because the financial markets are so volatile — but some instruments fair better during periods of inflation, for example, which is where gold comes in. You can reduce the risk involved when you open a position in the financial market, by trading with an online platform like Plus500 for example, where you can employ risk management tools and speculate on the value of financial instruments like gold, without owning the underlying asset. 

Gold has long been classed as a worthy investment because of its ability to hold its value during periods of financial uncertainty and act as an investment hedge. If you’re looking to diversify your portfolio, here are some reasons why gold is a good investment and worth your consideration. 

Using gold to diversify your portfolio

As we previously mentioned, investment in the financial market is risky, but concentrating your trades to just one market is even riskier. To reduce your exposure in the one market, you should aim to open positions in different areas. For example, if you have an investment in the foreign exchange (forex) market, an investment in a financial instrument like gold will help to hedge your investment — which we will explore more in the next section. 

Furthermore, gold is regarded as a reliable asset and is a great option if you’re wanting to diversify your portfolio. It has historically outperformed other financial instruments and commodities, during periods of extreme market volatility. It is also a particularly good investment, if you have a position in the stock market. If the stock market was to experience a crash, gold would not be impacted and therefore, only one segment of your portfolio would be impacted. 

Gold as an investment hedge 

Hedging is an investment strategy to protect your capital, opening a position that will offset the potential losses or profits of another asset in your portfolio. Gold is a popular investment hedge for those investors who have positions in the forex market, specifically those with investments in the US dollar (USD), because of their intrinsic relationship. 

You can use gold as a hedge against the decline of the dollar because the value of the precious metal is quoted in dollars — therefore, a weaker dollar can make gold a cheaper asset to hold in your portfolio. On the other hand, if the value of the dollar increases it can also cause the rise in value of gold. 

Gold protects against deflation 

Gold is well-known to outperform other financial instruments during periods of inflation, but also, deflation. Deflation is when the price of a country’s goods and services fall, and this takes place when inflation levels fall below 0%. This places a country’s economy in severe debt and subsequently causes financial markets to react, triggering high volatility levels. 

Deflation has not occurred since the Great Depression of 1930 and during this event, gold’s value soared. This is because people converted their life’s savings into gold coins in order to protect their capital. At this point in history, money was practically worthless, but gold’s value was assured. 

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Gold can be classed as a good investment because of its capability to outperform other assets during periods of economic uncertainty, and is a fairly low-risk trading venture. This being said, any exposure in the financial market is risky, as prices can rise and fall extremely quickly, reacting to macroeconomic factors and influenced by market sentiment. 

As a result, it’s vital that you understand what factors can affect prices, understand fundamental analysis, and use an economic calendar to plan ahead and make informed predictions.