Afraid the US dollar is on its way to hell in a handcart? If so, you should definitely consider trading gold. The precious metal traditionally strengthens when the American currency weakens. That's because a falling dollar is associated with nervousness among investors, particularly about inflation. Rightly or not, gold is widely seen as a safeguard against rampant inflation.
While gold consistently tends to move in the opposite direction to the greenback - see chart, with dollar shown upside down to allow easy comparison - there is a problem with using the precious metal as a hedge against the dollar: gold is itself priced in US dollars. So, even if you're right about the outlook for the buck, your profits from buying gold will be diminished because they'll be paid to you in a devalued currency!
One solution to this problem is to take out a currency hedge. At the same time as when you buy gold, you do another trade selling the dollar against your home currency. That way, you should more or less get the full benefit if gold rises. Of course, hedging involves more thought and effort and will cost you that much more in trading expenses.
Spread 'em
However, there are ways to trade gold without any currency risk at all. One of the cheapest and most straightforward of these is to do a spread bet. With a spread bet, your position will be in pounds, from start to finish. You deposit pounds in your spread betting account and receive sterling profits back. Any currency fluctuations are irrelevant.
Let's see this in action. You do a buy trade on gold at $1150, staking £5 a point. Your total position is therefore worth 1150 x £5 = £57,500. Thanks to a drop in the dollar, gold rises to $1250 over the next two months. Your position is now worth £62,500. What happened to the dollar is of no concern. Gold went up 8.6 per cent and you made a profit of the same amount.
No income tax, no VAT
The other major advantage of trading gold via a spread bet is that you won't pay a penny in capital gains tax - or any other form of tax. While there are other ways of investing in gold that offer similar breaks, particularly when it comes to certain coins, none can match a spread bet for sheer convenience.
You don't need to be as rich as Midas to trade spread bets, either. With some spread betting firms, you could take a position in gold worth as little as £1000 in total, if that's what you wanted to do. In the next section, find out where we think the best entry points lie for gold.
