Trading The Gold Market To Go Up And Down
Gold has had a tremendous year. The flight to the perceived safety of gold, as well as the US Dollar weakness, has pushed the metal straight through the $1,000 per ounce mark and up to $1,200.
However, it has not been a smooth upward journey. Investors should be aware that 'pull backs' in gold can be very violent indeed.
We have had two major retracements in the last four years from fast rallies. Both of these finally ran out of steam but not before wiping out at least 25% of the price.
If the same were to happen this time, Gold would slip towards the $900 mark.
The acceleration of the gold market towards the end of 2009 was remarkably similar to the March/May move of 2006 and Oct/March 2007/2008.
Both of these rallies saw sharp pull backs before regaining the upward momentum. The current target for the more aggressive gold bulls remains $1400. This level is a good deal closer now than when it was first mentioned by certain analysts. Having said this, it must be mentioned that Gold is having problems getting to $1,400.
As it turns out, the problems concerning Dubai presented a massive buying opportunity. Of course, Dubai did give us the lesson that the markets are prone to sharp declines. Any such decline could shake out many bulls and compound moves to the downside.
That is the risk of getting in at these levels. Whilst the upside could be fantastic, investors must have the stomach for possible shocks to the downside. On a bad day that could be as much as 5% in a couple of hours.
So what to do? One option is to spread bet on gold. With spread betting you can trade in both directions. If the market looks like it will continue up, then you could bet on it to go up. Likewise, if a correction is due you can look at betting on the price of gold to go down.
All forms of financial investment have the potential for incurring losses. For example, trading in stock, property, investment funds and pensions can lead to you losing money. With
spread bets your losses can exceed your initial investment.
Nevertheless, spread bets are a simple way of a) gaining access to the gold market and b) being able to trade the market in both directions.
Yes, the gold market may move the wrong way. However, there are measures you can take to reduce your risks. You can add a Stop Loss to your trades which will mean that, if Gold moves against your position, the stop loss will close your bet and stop you from losing any more funds.
On the plus side, the 24-hour trading that some firms like
Capital Spreads offer on key markets can provide several opportunities. Whilst the underlying financial instrument may be closed you can still place trades on markets like Gold, Oil, the FTSE 100 and GBP/USD from Sunday night all the way through to Friday evening.
by: Thomas Bainbridge
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