Buying gold as an investment in 2021

Education / 5 Min Read
Milan Cutkovic / 17 Aug 2021

Gold is a precious metal that has been around for a long time and has been primarily used for coinage and jewellery. It is easy to see the important part that Gold has played in the global economy over the years.

It was used as currency during many eras, and the Bretton Woods system was built around it which ran from 1944 to 1971. It reached a new all-time high in 2020 but with some recent years of uncertainty, let's dive into whether or not gold as an investment in 2021 is still a smart move and if this precious metal is still a safe haven for investors.

Trading precious metals have become an increasingly popular avenue for both short term and long term investors. Let's look at gold more closely and some of the important factors in the world steering the price of gold.

What moves the price of gold?

There are multiple factors that can affect the gold price, but the following two are amongst the major ones:

Geopolitical developments

The precious metal is generally seen as a safe haven, and prices tend to rise during times of geopolitical tensions.

Inflation fears

During times when investors are worried about rising inflation, gold will generally appreciate, as holding cash becomes increasingly unattractive.

Monetary policy

Gold and the US Dollar have an inverse relationship. Therefore, expectations of rising interest rates in the US will boost the Dollar and put Gold under pressure. On the other side, should US rate expectations decrease, the US Dollar may decline while gold prices rally.

Physical supply/demand

Buying gold ETFs or trading gold CFDs and futures has become popular, but physical gold is still being used for the production of jewellery and investment (e.g. coins and bars). Demand for such products will have an influence on the gold price too.

Gold benchmark

The LBMA gold price is the benchmark price for gold delivered in London, and the most popular one of its kind worldwide.

Is gold a good investment in 2021?

Inflation has been a key market theme in 2021, and it is likely to keep investors occupied in the near-term. Inflation is rising across the globe, and even developed markets such as United States and Europe are seeing a sharp uptick in the inflation rate following a prolonged period of consistently low inflation.

The fact that none of the major central banks are in a rush to hike rates anytime soon means that cash will remain an asset class that investors will avoid. While this could keep gold prices supported in the near-term, there are risks that could limit the upside potential for the precious metal.

First of all, the Federal Reserve is slowly preparing to unwind its ultra-loose monetary policy, and the market is anticipating that it will be forced to hike rates sooner than expected. Rising rates will lead to a stronger Dollar, which in turn is negative for Gold. 

Furthermore, risk appetite in global markets remains healthy. Stocks continue to post fresh record highs, and while there are concerns around the pandemic and rising inflation, it is far from panic. As long as risk appetite remains high, gold might struggle to gain significant momentum.

Further reading: How to perform technical analysis

Gold bars

Why should you invest in Gold?

It's never wise to count out gold as an investment since the 'safe haven' precious metal is a valued member of many traders and investors diversified portfolios. When thinking "should I buy gold in 2021?" consult with these points to make a stronger decision for the investment.

  • Store of value - Gold is an asset that maintains its value, rather than consistently depreciating. Furthermore, it has a long history and remains highly valued across the globe.
  • Inflation hedge - Gold is a good long-term hedge against inflation, a topic that has become increasingly relevant in 2021.
  • Geopolitical uncertainty - In times of political crisis, conflicts and wars, investors are seeking a safe haven, and gold has proven to be one of the most popular ones.
  • Increasing demand - Gold jewellery ownership is rising, especially in Asia, with China and India being the two largest bullion buyers. As their middle classes continue to grow, so is the demand for precious metals.
  • Weakness of US Dollar - Gold and the US Dollar have an inverse relationship, meaning the price of gold is likely to appreciate when the Dollar is falling, and vice versa. 
  • Supply constraints - The supply of the precious metal will eventually run out. Gold mine production is barely increasing anymore, while demand for it remains strong. While "Peak Gold" might not be in reach, it is something to keep in mind.
  • Portfolio diversification - Having gold in one's portfolio can reduce losses in times when the stock market is falling. Its correlation to other major asset classes is low enough to make it a good diversification tool, and at the same time, it is one of the most liquid markets worldwide.

Different ways to invest in Gold

Gold Futures CFDs

A futures contract is a contract to buy or sell a particular asset at a predetermined price at a specified time in the future. Futures are particularly popular amongst short-term traders who wish to speculate on the direction of the gold price. It can also be used for hedging purposes - for example, an investor holding physical gold will not want to sell those frequently, as the transaction costs would add up quickly. Instead, the investor could go short on gold to gain from a decline, while keeping their physical gold as a long-term investment. 

ETFs

Exchanged traded funds have seen a meteoric rise in the past few years, as they are a cost-effective way to invest in a certain asset. Gold ETFs could be suitable for investors looking to invest in gold while keeping transaction costs low.

Gold coins

Coins remain popular, and the 5 most popular gold coins are Krugerrand (South Africa), American Eagle (United States), Canadian Maple (Canada), Australian Nugget (Australia) and the Chinese Panda (China). The disadvantage is that those coins will always be sold at a premium, and investors need to store it appropriately, which can add to the costs (for example, buying a safe or renting a safe in a bank).

Gold bars

Gold bars are available in a variety of dimensions. Premiums are a bit lower, and the market for gold bars is more liquid than for coins.

Gold mining stocks

Gold mining stocks can be traded or invested in through individual stocks, stock CFDs or ETFs that consist of a portfolio of gold miners.

Which form of Gold is best for investment?

The best form of gold for investment really depends on the type of investor and for what purpose they want to hold gold. For a long-term investor who wants to include gold as part of their portfolio, Gold ETFs might be the most suitable solution, along with physical gold.

On the other hand, short-term speculators will find Futures Contracts and CFDs much more suitable, especially since they can bet on price movements in either direction. That doesn´t mean that long-term investors cannot make use of those two. Futures and CFDs can be used for hedging purposes by long-term investors.

For example, if you expect that Gold prices will decline over the next 3 months, you can go short on gold by using either of those instruments, while keeping your long-term investment intact.

How to trade Gold with Axi

With Axi, you have the ability to trade Gold as both Futures CFDs and Spot instruments. Futures CFDs derive their pricing from underlying futures contracts, while bullion CFDs derive their pricing from the underlying spot market.

The ticker symbol for gold is XAU. The letter “X” represents “Index” while ‘AU’ is gold’s chemical symbol and stands for ‘Aurum’, the Latin word for gold.

Using a ticker makes it easy to search for products on the MT4 trading platform. With Axi you can trade gold as a CFD against the USD, AUD, CHF, EUR and GBP. A gold trade against the US dollar would be displayed as XAUUSD. When trading gold futures CFDs, the symbol will be shown as 'GOLD.fs'.

Gold futures: If you believe the price of gold is likely to go higher in the future, you can enter into a contract with a seller and agree upon a fair price to be paid today so that when the physical gold is delivered upon contract expiry, you can then sell the physical gold for more than what you paid.

Gold CFDs: Use a CFD to trade the real-time price movement of gold without having to buy any physical gold. Since CFDs are leveraged products, you only need to invest a small sum to gain full exposure to the underlying trade. Note that the profit or loss is calculated according to the full size of the trade position, so both profits and losses are magnified.

Futures and CFDs are the more common forms of trading commodities online.

Trading gold with Axi

Which market participants trade Gold?

Gold is a popular instrument both for short-term speculators and long-term investors. 

Investors tend to:

  • Buy physical Gold (coins/bars) or invest in Gold ETFs
  • Hold it over a long period of time
  • Use it as an inflation hedge or portfolio diversification tool

Speculators tend to:

  • Trade Futures contracts or CFDs
  • Go both long and short
  • Hold positions from seconds to months – depending on the profile of the speculator (e.g. an algorithmic fund may keep the position open for seconds, while a macro hedge fund may keep the position open for months)

The major global trading hubs for Gold are London (LME), Chicago (COMEX) and the Shanghai (Shanghai Gold Exchange). London is still by far the biggest trading hub, but recent trends have seen a shift towards the East, with the Chinese market becoming increasingly important. 

Outlook on Gold for the rest of 2021

Interest rates and rising inflation will remain the key factors that will influence the price of gold in the second half of the year. Following a stellar performance in 2020, the precious metal has been struggling in the first 6 months of 2021 due to speculations that the US central bank might start to unwind its ultra-loose monetary policy earlier than expected.

At the same time, investors became increasingly optimistic that the world economy will bounce back from the pandemic-induced recession earlier and stronger than initially anticipated. Stocks continue to trade around near record highs, and there are no signs of panic in global markets, despite the on-going uncertainties.

Taper talks are likely to intensify in the coming months, as the pressure on the Federal Reserve will grow. This would benefit the US Dollar, while capping the topside in XAU/USD.

However, it is not all looking gloomy for gold. Inflation fears remain present, and should market participants become worried that the economy might overheat and central banks will do too little, too late - there might be another rush to buy gold as a safe haven.

Furthermore, the pandemic is far from over. Should there be renewed lockdowns and major restrictions that could jeopardise the global economic recovery, stocks could come under pressure and rate expectations would fall - giving gold an additional boost.

Live price chart for XAUUSD

 

Pros and cons of investing in Gold

The pros of investing in Gold are that it has historically been a good hedge against inflation, it maintains its value, is highly liquid and is a good diversification tool for your portfolio.

On the other hand, the cons are that the storage of physical gold can be complicated and costly (depending on how much you own), it doesn´t have any yield (unlike stocks, which can generate dividends) and returns tend to be poor during times when markets are in a risk-on mode.

 

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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