Due to its unique position within the global economic and political systems, the gold market provides significant liquidity and exceptional potential to benefit in almost all circumstances, regardless of whether it acts like a bull or a bear. Even while many people decide to buy the metal directly, trading on the futures, equities, and options markets provides excellent leverage with manageable risk.
Because they are unaware of the distinctive features of the global gold markets or the hidden hazards that might steal gains, market participants often fall short of maximizing the benefits of gold price changes.
Although trading in the yellow metal is simple, it requires specialized knowledge. Incorporating these four strategic measures into daily trading routines can benefit experienced investors, but beginners should use caution. While waiting, explore until you are familiar with the nuances of these intricate marketplaces.
1.) What Drives Gold Price
Gold is one of the world’s oldest currencies and has a strong psychological hold on the financial industry. Yellow metal is a topic on which almost everyone has an opinion. Yet, gold itself only responds to a small number of price triggers. Each of these factors divides into two halves, creating a polarity that affects trend intensity, emotion, and volume:
-Both inflation and deflation
-Fear and greed
-Demand and supply
While market participants trade the yellow metal in response to one of these polarities when another is driving price movement, they run a higher risk. Say, for instance, that the global financial markets experience a selloff and gold has a significant rise. Many traders enter the market assuming that fear is driving up the price of the yellow metal and act on this assumption. Inflation may have been the cause of the stock’s drop, drawing a more technical audience that will aggressively sell against the gold surge.
In the global markets, combinations of these factors are always at work, creating long-term themes that follow equally long uptrends and downtrends. For instance, the 2008 Federal Reserve (FOMC) economic stimulus initially had minimal impact on gold because market participants were preoccupied with the intense panic that followed the 2008 financial crisis.
2.) Recognize the Crowd
Numerous groups with various, often competing interests are drawn to gold. Gold collectors, known as “gold bugs,” are at the top of the heap, investing a disproportionate amount of family wealth in gold stocks, options, and futures. These long-term participants are seldom deterred by downward trends and ultimately push away less ideological participants.
Additionally, institutional investors who purchase and sell gold alongside currencies and bonds in bilateral strategies known as “risk-on” and “risk-off” engage in significant hedging activity. Funds may quickly trade these combinations by assembling baskets of securities that balance safety and growth (risk-on and -off, respectively). They are particularly well-liked in marketplaces with much disagreement and low levels of usual public engagement.
3.) Study the long-term chart.
Spend some time being intimately familiar with the gold chart, beginning with a long-term history that spans at least 100 years. The metal has not only established patterns that lasted for decades, but it has also slowly declined for extended periods, depriving gold bugs of earnings. This study pinpoints price levels that should be kept an eye on from a strategic perspective in the case and when the yellow metal makes a comeback to test them.
The following slump persisted throughout the late 1990s before gold began its legendary rise, which reached its peak in February 2012 at $2,235 per ounce. Since then, there has been a gradual fall that has lost almost 600 points in four years. Even though it saw its highest quarterly rise in three decades in the first quarter of 2016, it is now priced at $1,882 per ounce as of May 2022.
4.) Select Your Area
Liquidity fluctuates with gold movements, rising or falling substantially during times of increased volatility and falling during times of relative calm. Due to far lower average participation rates than stock markets, this oscillation has a more decisive influence on the futures markets. The CME Group, based in Chicago, hasn’t significantly improved this equation in recent years despite adding new products.
The 100-oz. contract, the 50-oz. mini contract, and the 10-oz. micro contract are the three principal gold futures that CME provides. These contracts were introduced in October 2010. The volume of trading for the micro contract exceeded 6.6 million in 2021, but only 26,000 for the mini and 1.2 million for the most significant contract.
Although long-dated futures held for months are unaffected by this limited participation, trade execution in short-term positions is severely impacted, driving up slippage costs.
Although the VanEck Vectors Gold Miners ETF (GDX) grinds through more significant daily percentage fluctuation than GLD, it comes with a higher risk due to the volatility of its association with the yellow metal. The influence of spot and futures prices is reduced by the extensive price hedging used by large mining firms, whose operations may also retain considerable holdings in other natural resources, such as silver and iron.