Finance and Law

Why Trade Gold and Silver as CFDs?

2020 brought the emergence of the Covid pandemic, which ended up boosting gold prices significantly. When huge government stimulus packages started rolling out, traders expected inflation to pick up, which drove up the demand for the shiny metal. By August 2020, the gold price was up over 30% since the start of the year and the same was true of silver. The inflation that settled during that year and the next one might have pushed gold prices up further, since gold is viewed by some traders as a hedge against inflation. However, at the end of 2021, gold had “Failed to capitalize on this year’s scorching-hot inflation”, reported Bloomberg. In fact, gold lost more of its value last year than in any year since 2013. This had to do with the US dollar showing some strength and the fact that “There’s very likely a March hike followed by quantitative tightening, which is very bad for stocks and gold”, in the words of Jay Hatfield of Infrastructure Capital Management.

The reason that gold prices often move in the opposite direction to the US dollar is that, when the dollar is weak, more gold can be bought (since gold is denominated in US dollars), which increases the demand for the commodity, together with its price. By contrast, a strong dollar can push gold prices down. When inflation is on the rise, the demand for gold tends to go up with it. Therefore, when the US Federal Reserve shows signs of wanting to raise interest rates to curb inflation, gold prices can be depressed, as mentioned above. Needless to say, gold can be a volatile asset at times, providing both opportunity and risk for those who engage in gold trading via CFDs. Let’s take a more detailed look at the story of gold in 2021 to get a better idea of where prices may be headed next.

2021

Earlier in 2021, the success stories of vaccines were giving people hope that the pandemic was soon to be under control, which might have given traders reason to hesitate about buying gold. But when the US Democrats won the senate, this seemed to indicate that more fiscal aid and infrastructure stimulus programs were on the cards, as well as a prolonged spell of inflation, which made the metal more desirable. Other factors that supported gold prices were the strong jewellery demand in Asia and the fact that central banks bought up the commodity.

However, gold did not perform as well as expected. In order to understand why the high inflation in the latter part of 2021 didn’t buoy up gold prices, we need to remember that traders were expecting government stimulus programs to start coming to an end, which would normally hold inflation down. Another reason financial investor’s lost interest in gold had to do with their high level of interest in Bitcoin investments. All in all, gold lost 10% of its value in 2021. Going into 2022, it will be interesting to see ifa more powerful US dollar could mean extended pressure on gold in times to come.

Gold Drivers

Supply and demand, of course, play big roles in determining gold prices. The demand for gold comes mostly from the jewellery industry, but the metal is also used in electronics and medicines. In particular, ETF investment demand is an important driver of gold prices. Another factor is that, when governments buy gold for their reserves, this normally makes the price of the metal appreciate. Since 1971, when the USA left the gold standard, central banks have been the biggest gold buyers. In 2019, for example, 650 tons of gold was purchased by world governments. As to supply, this depends on mine production. After 2016,world gold supply platitude due to the increasing need to drill deeper into the earth to find the substance, which comes at higher mining costs.

Around the Corner

We can see that getting a picture of the direction gold prices will be heading at any given time is not a simple matter. Those interested in gold trading as CFDs should make sure they don’t miss any relevant news about US Fed policy, the spread of whatever Covid variant is dominating the news, and the US dollar in the coming months. CFD gold trading is a question offending a trusted and regulated brokerage with a user-friendly platform, and using a wealth of market analysis, news and educational materials offered by the broker to form an idea of which direction gold prices may be going. This means doing your daily homework to get a solid understanding of all the factors which can affect the price of precious metals like gold and silver, and seeing which current events may be particularly impactful.

Hardik Patel

Hardik Patel is a Digital Marketing Consultant and professional Blogger. He has 12+ years experience in SEO, SMO, SEM, Online reputation management, Affiliated Marketing and Content Marketing.

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