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  • Mohammed Shaheen

FOUR COMMON MISTAKES WHILE MAKING A GOLD TRADE.

Over the years, countless investors have added gold to their portfolios, thinking that exposure to the metal may provide benefits like enhanced returns or protection during periods of economic decline. It would be foolish to focus solely on the potential benefits of any investment without first considering the factors (favorable and unfavorable).

Investing always carries an inherent risk so to a certain extent whether you should consider investing in gold or not depends on how risk-averse you are. Some would argue that it is safer to stick with more conventional types of investing such as stocks and shares whereas others might take the view that in today’s turbulent and uncertain global economic climate it’s risky NOT to invest in gold!


To help out, we’ve compiled four common mistakes associated with investments in precious metal.


1. Having a superficial understanding of diversification

If you ask a typical investor how gold benefits a portfolio, they’ll likely say it adds diversification value. Ask them to explain further, and you’re likely to get different answers: It goes up when the value of the dollar goes down or its value rises when the stock market takes a hit. This assumes a negative correlation: When one goes up, the other goes down. Except, that isn’t always the case.


Yes, gold is a traditional inflation hedge. But there are times when inflation decreases while the dollar price of gold increases. Although gold prices can rise during a bear market, gold has also exhibited periods in which it has risen during bull markets. That doesn’t make it unreliable as a hedge. Gold can rise in both bull and bear markets and during periods of rising and decreasing inflation. Gold is an additional return source —and that is what makes it a strong asset for diversification.


2. Don’t invest just for the short term

Take a long-term view. There is much more likelihood of making a decent return if you do this. Even though gold has always gone up in value over time it has a history of short-term price fluctuation. If you buy gold today and there is a chance may need to liquidate your investment in a matter of weeks, months, or even just a year you may well find yourself selling it for less than you paid.


An important factor to take into account in this respect is the spread. The price when you buy will include dealer’s costs so you will immediately be ‘out of the money’ compared with what you could then sell it for. If gold happens to be going through a period of consolidation at the time you make your purchase you may have to wait quite a while before you even get to a breakeven position.


3. Blaming the Strategy

Many investors change their strategies too soon because they are not seeing immediate results. In all reality, the fault is not always in the strategy. Do not be someone who constantly changes their strategy when the results they desire are not forthcoming right away.

Give the strategy (and yourself) some time to work. Success in precious metals investing is not something that always happens in a few weeks or even months. It is important to manage your time, energy, and available capital with that in mind. Keep a long-term mindset and strategy, and over time you are much more likely to see success.


4. Doing minimal research

When considering a new investment, it is common to ask the advice of a few trusted friends or to browse a couple of websites. However, in the precious metals market, this kind of superficial research can be quite misleading. Looking at general information or quickly choosing what metal type to buy could leave you with a lot of misinformation and dramatically detract from your investment value.


To develop a piece of thorough knowledge of gold trading and the financial market, register your demo account with Seven Capitals today.

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