When is the Best Time to Start Trading Gold?

by Justin Weinger on October 7, 2019 · 0 comments

Gold prices fluctuate for several reasons. The yellow metal is considered a safe-haven asset. It is also considered a hard asset that can be used as a hedge against rising inflation. Gold is viewed as an alternative currency that will outperform when other currencies are unattractive. Investors can buy gold, using several methods, but can only sell gold using specific derivative products.

How Can you Trade Gold?

There are several ways to invest in gold. Some individuals like to buy physical gold. This includes gold bars, gold coins or even gold jewelry. Some investors are more comfortable buying gold stocks, which include companies that mine for gold. You can purchase gold futures contract or gold exchange traded funds as well as trade gold contract for differences (CFDs).

How Does Gold Trade?

Gold is viewed as a commodity, called a precious metal. It is also viewed as a currency, traded against the US dollar. When gold is transacted in the over the counter market and future market, it has an interest rate. The gold forward rate or gofo rate is the rate that is used to create a forward market for gold. When you trade gold in the CFD market, the gold forward rate is incorporated into the price of gold.

When Should You Trade Gold?

Gold traders look for several signs to determine when to trade gold. Gold trading often requires a view on the US dollar. If the dollar is rising, then the value of gold in other currencies is moving higher. This means that the price of gold needs to decline to incorporate the rise in the value of the greenback.

The US dollar generally moves higher when US interest rates are increasing relative to other currencies. For example, if US economic activity is expanding or stable and Europe and Asia are contracting, then the dollar is likely to rise, and gold prices will face headwinds. When the US is contracting, and Asia and Europe are expanding the dollar is likely to fall which will pave the way for higher gold prices.

Gold also trades technically. The yellow metal will fluctuate within ranges. You can use technical analysis such as support and resistance, trend following and momentum to determine the next move in the price of gold.

Geopolitical risk also is another strong catalyst that can help buoy the price of gold. When war breaks out or a trade war escalates, traders will often purchase gold as a safe-haven asset. When geo-political tensions decrease, it represents an opportunity to sell or short gold, speculating that the price will move lower.

Lastly, many investors look at gold as a hedge against rising inflation expectations. When the cost of a basket of goods rises, the market conditions can erode the value of fixed income products. As the value of bonds or bills declines, gold prices might keep up with inflation, and offset those loses.

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