How is gold traded and traded

 

Whether behaving like a bull or a bear, the gold market offers high liquidity and excellent profit opportunities in almost all environments due to its unique location within the economic and political systems of the world. While many people choose to own the metal outright, speculation through the futures, stock and options markets provides incredible leverage with calculated risk.


Market participants often fail to take full advantage of gold price fluctuations because they have not learned the unique characteristics of the global gold markets or the hidden pitfalls that can steal profits. Additionally, not all investment vehicles are created equal: some gold instruments are more likely to produce consistent stable results than others.


It is not difficult to learn to trade the yellow metal, but the activity requires skill sets that are unique to this commodity. Beginners should tread lightly, but seasoned investors will benefit by incorporating these four strategic steps into their daily trading routines. At the same time the experience until the intricacies of these complex markets become user.

1. What moves gold

As one of the oldest currencies on the planet, gold has deeply permeated the psyche of the financial world. Almost everyone has an opinion about the yellow metal, but gold itself only reacts to a limited number of price catalysts. Each of these forces divides the medium into a polarity that affects sentiment, magnitude, and directional intensity:


inflation and deflation-

Greed and fear-

Supply and demand-

Market players take a high risk when they trade gold in reaction to one of these polarities, when in fact it is another element that controls the price action. For example, let's say a sell-off hits the global financial markets, and gold takes off on a strong rally. Many traders assume that fear drives the yellow metal and jump in, believing that the emotional masses will blindly drive the price higher. However, inflation may have actually caused the stock to drop, drawing in more of the technical crowd who will sell against gold's strong rally.

The combinations of these forces always play a role in global markets, creating long-term themes that track long-term uptrends and downtrends. For example, the Federal Reserve's (FOMC) economic stimulus, which began in 2008, initially had little impact on gold because market players were focused on the elevated levels of fear resulting from the 2008 economic crash. Quantitative measures encouraged deflation, setting up the gold market and other commodity groups for a major reversal.



This shift did not happen immediately because an attempted deflation was underway, with declining financial and commodity-based assets spiraling back toward historical means. Gold finally peaked and turned lower in 2011 after deflation completed and central banks intensified quantitative easing policies.

   The VIX fell to lower levels at the same time, indicating that fear is no longer an important driver for the market.

2. Understand the crowd

Gold attracts many crowds with diverse and often conflicting interests. The gold bugs stand at the top of the heap, collecting physical bullion and allocating a large portion of family assets to gold stocks, options and futures. These are long-term players, rarely discouraged by downtrends, who ultimately remove less ideological players. In addition, retail participants include nearly all of the gold bug groups, with few funds dedicated entirely to the long side of the precious metal.


Gold bugs add massive liquidity while maintaining a floor under equity futures and gold because they provide a continuous supply of buying interest at lower prices. They also serve the opposite purpose of providing an effective entry for short sellers, especially in emotional markets when one of the three fundamental forces polarizes in favor of strong buying pressure.


In addition, gold attracts massive hedging activity by institutional investors who buy and sell in combination with currencies and bonds in binary strategies known as "risk on" and "risk off". Funds create baskets of instruments that match growth (risk) and security (non-risk), and trade these groups through lightning-fast algorithms. They are especially popular in highly contested markets where public participation is lower than usual.

3. Read the long-term chart

Take time to learn the gold scheme inside and out, starting with a long history dating back at least 100 years. In addition to snapping at decades-old trends, the metal has also fallen for incredibly long periods of time, depriving the gold bugs of profits. From a strategic point of view, this analysis identifies price levels to watch if and when the yellow metal returns to test them.


Gold's recent history shows little movement until the 1970s, when after removing the dollar gold standard, it set off on a long bull run, supported by rising inflation due to skyrocketing crude oil prices. After reaching $2,420 an ounce in February 1980, it turned lower near $800 in the mid-1980s, as a response to the Fed's restrictive monetary policy.


The subsequent downtrend continued until the late 1990s when gold entered a historic uptrend that culminated in the February 2012 high of $2235 an ounce. The steady decline since then has shed about 600 pips in four years. Although in the first quarter of 2016 it rose 10% for its biggest quarterly gain in three decades, as of May 2022 it is trading at $1,882 an ounce.