What are the risks of frying gold?

2023-06-05
Summary:

When trading gold, it's important to be aware of the potential risks involved. Learn about the risks of frying gold to make informed investment decisions.

Gold speculation is an investment product based on gold, such as spot gold. The value of gold is not easily overturned, so gold speculation has always been popular. Most ordinary investors like to speculate in gold because they can earn price differentials through personal trading, and as a financial investment, speculating in gold is also a high-income industry job, so market participants are very fond of it. However, speculation in gold is not a win-win situation, as there will always be losses during the trading process. So what are the risks of speculation in gold?

the risks of frying gold

Risks of gold speculation:

1、 Market risk

In the financial system, it is very easy to have market risk problems, which are mainly caused by changes in the market environment or changes in the market value of financial instruments and portfolios. By combining different market variables, this risk can be divided into interest rate risk, exchange rate risk, commodity price risk, and gold price risk.

For gold investment, when there are sharp changes in the gold market and price trends, it often poses great risks to investors.


2、 Credit risk

Credit risk mainly refers to the risk that borrowers are unable to repay their principal and interest within the agreed period, which is one of the most critical risks that commercial banks face. Generally speaking, people define credit risk as the loss and risk of a counterparty not fulfilling a contract, which is also known as default risk.

For gold investment, credit risk mainly refers to the risk that investors do not comply with corresponding trading rules and clearing systems, leading to the risk of advance payment of funds.


3、 Liquidity risk

Generally, financial products have the ability of price deformation in the normal market, that is, liquidity; Market liquidity mainly refers to the convenience of purchasing and selling financial industries in the market, which is a measurement of market transaction volume.

Regarding liquidity risk, it mainly refers to the liquidity of a person with non-performing assets, or the possibility of losses or bankruptcy due to the depletion of external financing. For gold investments, liquidity risk refers to the risk posed to the liquidity of investors' funds due to the freezing or loss of available funds.


4、 Operational risk

Operational risk mainly refers to the risk of other losses caused by the failure of financial institutions' information systems or internal control mechanisms. The causes of this risk problem are: operational errors of relevant personnel, system failures, etc. Many investors choose to invest in gold due to its relatively low market entry threshold and natural inflationary nature.

However, some investors blindly operate, especially preferring derivative products such as gold extensions and gold futures, which greatly increases the risk of gold investment. This is mainly reflected in the leverage effect of margin trading and Securities lending in these gold investment products. Although it will amplify capital, it also increases the risk simultaneously, causing investors to encounter liquidity risk, market price fluctuation risk, and forced liquidation risk.

For gold investors, errors in operating the trading and buying system may lead to investors losing the opportunity to make profits.


5、 Leverage risk

One of the reasons why the speculative gold trading market attracts many investors is the existence of leverage. Through the amplification of leverage, investors' profits will be greatly amplified. However, if investors choose leverage that exceeds their tolerance level, high leverage is likely to bring higher risks to investors.


6、 Legal risks

Legal risk mainly refers to the risk caused by financial institutions signing contracts that violate relevant laws and regulations and have unrealistic performance, mainly reflected in the risks of contract signing and execution, legal and regulatory responsibilities, and transfer to the other party.

For disputes or lawsuits arising from gold investment, the lack of sound laws and regulations leads to investors lacking fairness and impartiality in dispute resolution, leading to investors losing the lawsuit.


7、 Settlement risk

Settlement risk mainly refers to the risk of losses caused by the counterparty not receiving cash or other financial instruments. The gold market belongs to the currency market, and there are certain differences between its trading time and system, so there is great settlement risk in gold trading.

Due to currency exchange restrictions on gold investment, investors often encounter obstacles in the process of fund settlement or have adverse effects on their fund utilization efficiency due to delayed fund settlement.


【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.

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