Key Basics of Gold Trading

In the past commodity trading was only available to trader with large accounts, high risk tolerance and a good understanding of how the futures market works. During the past 7 years with commodities making incredible moves and gaining attention from the media, several exchange traded funds (ETF’s) have been created allowing everyone to take advantage of the commodity market.

Gold was the first commodity back in 2002 which really made traders and investors want into the commodity market. Silver was followed shortly after in popularity, then crude oil and natural gas. While most commodities were on fire these are the ones that the media took a hold of and make them well known to everyone as prices soared month after month.

Commodities should have a place in everyone’s portfolio in my opinion. And a simple way of doing that is through the use of ETFs. The wild fluctuations in investor sentiment are not likely to end any time soon and therefore, traders are looking for ways to reduce their exposure to the risky market. One of the ways to do this is to diversify outside stocks and into the other capital markets. Fortunately, the market has plenty of alternative ways to invest across other asset classes or capital markets within your existing stock and options accounts. 


Gold is an interesting asset class for diversification because it is not correlated with stocks, which means it will move independently of the major indexes over the long term. Gold is also considered a good hedge against a weak USD. If the U.S. financial sectors are being disrupted (which they are) traders are going to worry about the greenback and its relative value versus other currencies will drop. As that uncertainty increases you can buy calls on GLD or the ETFs shares themselves to profit from those movements.

The bottom line is that the more irrational the market becomes the more a savvy investor should be looking for ways to mitigate risk, find new opportunities and improve diversification. Gold and the GLD ETF is one of several asset classes that can be used in times of uncertainty to accomplish those objectives.

Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social, or currency-based crises. These crises include investment market declines, inflation, war, and social unrest. Investors also buy gold during times of a bull market in an attempt to gain financially.

Factors influencing the gold price

·        the price of gold is ultimately driven by supply and demand

·        mainly affected by changes in sentiment, rather than changes in annual production.

·        Central banks and the International Monetary Fund play an important role in the gold price

·        Inflation estimates.

·        real interest rates

·        War, invasion, looting, crisis-In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation

·        illegal collusion to control the price and supply of gold and related financial securities.

 Reasons investors buy gold

·        to financially gain from increasing gold prices,

·         as a hedge or safe haven against any economic, political, social or currency-based crises.

Methods of investing in gold

·        Directly though investment in gold can be done directly through bullion or coin ownership

·        or indirectly through gold exchange-traded funds, certificates, accounts, spread betting, derivatives or shares.

Investment strategies

Fundamental analysis

·Investors using fundamental analysis analyze the macroeconomic situation- international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices, yearly global gold supply versus demand.

Technical analysis

·involves analyzing chart patterns, moving averages, market trends and/or the economic cycle in order to speculate on the future price.

Bulls versus bears

·Since April 2001 the gold price has more than tripled in value against the US dollar, prompting speculation that the long secular bear market (or the Great Commodities Depression) has ended and a bull market has returned. A World Gold Council report released on February 18, 2009 showed physical gold demand rose sharply in the second half of 2008. Identifiable investment demand for gold, which includes ETFs (exchange-traded funds), bars, and coins, was up 64 percent in 2008 over the year before.

·In the last century, major economic crises (such as the Great Depression, World War II, the first and second oil crisis) lowered the Dow/Gold ratio, an indicator of how bad a recession is and whether the outlook is deteriorating or improving, to a value well below 4. The ratio fell on February 18, 2009 to below 8. During these difficult times, investors tried to preserve their assets by investing in precious metals, most notably gold and silver.