Gold Trading: Reasons for the Rise in the Price of Gold

Looking at the price index of gold, the one thing that can be concluded is that the price of gold has almost doubled in the last four years of the decade ended 2010. This fact becomes even more interesting when compared with other investments, such as stocks and bonds. “Over this time, stocks have struggled to produce any significant return for investors, and many stock indices remain significantly below their levels of four years ago,” says John Kicklighter, Currency Strategist and author at Daily Forex and Market News. Since the interest rates of even the government bonds have approached zero, it is no surprise that many investors have switched to gold trading.

Many novice traders buy gold simply by being inspired by newspaper headlines that talk about new hikes in gold prices. They are tempted by the thought of making big bucks through gold trading. As they step into the market without enough knowledge, they face the risk of incurring losses. It is crucial to understand the basics of gold trading before jumping onto the bandwagon.

Gold Trading: Why Have Gold Prices Doubled Over the Past Half Decade?

For hundreds of years, gold has been considered as a ‘safe haven’ by investors. Till the 1930s, gold was used as a currency. Even today, when uncertainty prevails in the market, many investors switch to buying gold as they feel sure that this previous commodity will not lose its value over a certain period. The price of gold, which was at $600 in 2006, more than doubled by the beginning of 2011. Many reasons can be stated for this hike in gold prices:

• During the financial crisis of 2007-2008, stock markets plummeted and a number of corporate debts went unpaid. This resulted in a rise of nearly 50% in gold prices.
• The rise in gold price was even more intense when measured against more risky currencies, such as the Australian dollar.
• With the bankruptcy of Lehman Brother in September 2008 and the nationalization of AIG (American International Group), US investors opted for two things – gold and the US treasury bonds.
• An increase in unemployment rate and weak corporate earnings have resulted in low dividends, also keeping people out of stocks. This left people with little chance of income from bonds and stocks. Consequently, the demand for gold increased for investment purposes and so did gold prices.
• While talking globally, the Federal Reserve, Bank of Japan, Bank of England and European Central Bank are printing more currency to sustain their economies. None of them is planning to raise interest rates. Many countries are trying hard to keep their currencies cheap. So, cash is likely to lose value.
• A decade back, many investors avoided buying gold since they did not earn anything from holding this commodity. They preferred investing in stocks or other assets that paid them regular income in the form of dividends or interests. However, in today’s scenario, with interest rates so low, this trend has changed.

According to market experts, gold moves in the opposite direction to other financial assets, such as stocks. When the economy is sluggish or when there is some perceived risk in the market, stock prices tend to decline and the price of gold tends to rise. Against the backdrop of the political turmoil in Egypt and other countries, there is speculation of elevated gold prices in the near term.

Some market experts believe that gold prices remain elevated even when the market is doing well. This is because people who are risk averse prefer to invest in gold. As John Kicklighter says, “Despite the older historic trend, it looks like gold can rise when other markets rise or fall.”