Although gold is wealth insurance first and foremost, there are some people who prefer to buy it strictly as an investment. Whether you’re a long term investor or a short term trader, gold trading is a legitimate alternative for diversifying your capital. Gold trading involves buying and selling gold, which can include both financial trading and physical trading. While physical trading requires holding your bullion or coins, financial trading allows you to benefit from an upward (or downward) price movement in the yellow metal without the need to store your purchases.
Gold trading involves taking a view on the price of gold; this can be a long term view, or even a short term view. Gold trades like a currency and since it is priced in US dollars it generally performs well when the value of the dollar declines relative to most major currencies. On the other hand, when the dollar gains in value, the price of the yellow metal generally declines. The reason gold moves higher when the dollar declines in value is that when the dollar becomes cheaper relative to other currencies investors in those currencies will get a bargain and the price of gold needs to increase to keep the relative value in another currencies unchanged.
Online gold trading also requires the understanding of how interest rates fluctuate. In many of the long term over the counter gold trading markets, gold has its own interest rate. Just like there are dollar interest rates and yen interest rates there are gold interest rates. If you plan on holding gold for one year then, in theory, you would need to pay or receive the difference between gold interest rates where you are borrowing, and US dollar interest rates which you are lending. Most brokers incorporate this gold forward rate for you when you purchase or sell gold on their platforms.
Since gold trades like a currency, many traders use both fundamental and technical analysis to value the price of gold. If you are participating in gold trading, then you would evaluate economic data to determine if gold prices are going to move higher by analyzing inflation data as well as growth. If you believe that inflation might rise, then you could surmise that gold prices might also increase as many traders use gold as an offset to higher inflation.
Since gold trades against the dollar and also has its own interest rate component, it’s helpful to understand how monetary policy can affect gold prices. For example, if the Fed increases interest rates, then the dollar becomes more attractive relative to other countries currencies. If gold interest rates do not keep pace with US interest rates, then the attractiveness of the yellow metal declines. Paying attention to economic releases is also important as changes in the perception of growth and employment can directly affect the future direction of gold prices.
You might also consider looking at past price action. Technical analysis tools such as iFOREX training, FXCM and Plus500 offer trend line and moving average analyses that can help provide entry and exit areas to assist in your risk management techniques.
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