Secrets of Trading Gold

Human beings have long valued and treasured gold for its inherent lustre and malleability. In fact, gold has been used in human commerce since the societies of the ancient Middle East over 2,500 years ago, making it the oldest form of money still recognized today.Gold’s long track record as a store of value despite wars, natural disasters, and the rise and fall of great empires means that it is generally seen as the ultimate “safe haven” asset.

Therefore, it’s not surprising that interest in owning and trading in gold has skyrocketed in recent years with the onset of the Great Financial Crisis in 2008. Gold prices have risen in sympathy, hitting an all-time high above $1900 in late 2011. In this brief guide we will discuss the major forces that drive gold prices, along with some of the common methods for trading gold and a brief overview of possible trading techniques.

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Gold Tradiing

THE MECHANICS OF GOLD TRADING

Physical gold is valuable because it represents many of the qualities of ideal money. It is scarce, durable, portable, uniform across the world, and widely accepted—in part due to its long history of being widely accepted. However, in the current digital world, few traders actually take physical possession of gold bullion. Instead, most traders focus on trading the current “spot” gold price, which is based on the price of the most active futures contract on the COMEX (Commodity Exchange) in New York. For all intents and purposes, you can trade gold as you would any other trading instrument at GFT Markets.

Two of the most common ways to trade the price of gold are through CFDs or spread betting. Both of these products offer leverage, meaning that traders can control £1,000 of gold with less than £1,000 of margin. Leverage can offer great potential for profit if the market moves in your favor, but it can also lead to a large, rapid loss if the market moves against you. Therefore, it is essential to practice good risk management and place a stop loss with every trade.

FACTORS THAT INFLUENCE ITS PRICE

Gold is one of the most difficult financial assets to value. As we alluded to above, gold is similar to a currency, such as the U.S. dollar or the euro, in many ways; unlike these more commonly traded currencies, though, gold is not supported by an underlying economy of workers, companies, and infrastructure. In other ways, gold is more similar to a commodity like oil or corn because it comes from the ground and has standardized physical characteristics. Unlike other commodities, however, gold often fluctuates independent of its industrial supply and demand.

One of the most reliable historical determinants of gold’s price is the level of real interest rates, or the interest rate less inflation. If you think about it, this relationship is relatively straightforward. When real interest rates are low, investment alternatives like cash and bonds tend to provide a low or negative return, pushing investors to seek alternative ways to protect the value of their wealth. On the other hand, when real interest rates are high, strong returns are possible in cash and bonds and the appeal of holding a yellow metal with few industrial uses diminishes. One easy way to see a proxy for real interest rates in the United States, the world’s largest economy, is to look at the yield on Treasury Inflation Protected Securities (TIPS).

GOLD TRADING STRATEGIES

As with any trading instrument, there is no one “best” way to trade gold. Many traders from other markets have found that the technical trading strategies they employ on other instruments can easily be adapted to the gold market, especially given gold’s tendency to form durable trends. That said, longer-term traders could go a step further by using a filter based on the level of real interest rates discussed above.

The below chart shows the relationship between gold prices and the yield on TIPS, a proxy for real interest rates in the United States. The inverse correlation is obvious, but it looks like the recent gold rally accelerated further as real yields dropped below 1% in early 2009. A longer-term look at the relationship would reveal that gold prices generally fell in the late 1990s, for instance, which were characterized by real yields above the 1% threshold.

Therefore, longer-term traders may want to consider only buy trade opportunities if real yields are below 1%, a level which has historically been supportive of gold prices. Conversely, if real yields rise above 2%, traders may want to focus only on sell trades. The ability to use a filter based on real interest rates is one of the unique features that long-term traders can use to gain an edge when trading gold, but the trading strategies and opportunities in trading the world’s oldest “currency” are truly limitless.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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