In the world of financial markets, gold has always occupied a special place as a “safe haven” investment and a store of value.
This article was originally published by the Santa Barbara News Press on June 10, 2023.
I have never agreed with that description. One must pay a fee to buy and sell gold. There is a fee to store it. And it does not pay a dividend.
For a 36-year period, from 1934 to 1970, gold dropped from a high of $798 per ounce to a low of $284! Gold then rose to a record high in 1980 of $2,643 per ounce and then over the next 20 years consistently dropped to $452 per ounce.
Since then, this precious metal has risen to a high of $2,307 per ounce and has traded between $1,300 and $2,300 since.
An investment that has the potential to consistently drop in value over a 36-year period does not represent a “safe haven” in any investment portfolio I have seen!
At best, gold is a “hedge” against uncertainty.
During the Great Recession (2007-2009), I had a client come into my office and order me to “Sell everything! We are going to hell in a handbasket.
“Put all my portfolio in gold!” he told me. “I’m sure gold is going to $4,000 an ounce real soon!”
I was able to convince him to put only 10% of his portfolio into gold. I explained the history of this metal and how it is a good hedge against uncertainty and that he needed to stay the course with his investment plan. Gratefully he listened, as gold proceeded on a several year downturn.
While most investors prefer long-term positions in gold, there is also a more aggressive niche market for those who engage in short-term trading of this precious metal. This requires a unique understanding of market dynamics, risk management and an ability to capitalize on short-lived price fluctuations.
Short-term gold traders often rely heavily on technical analysis to make informed decisions. Gold trading revolves around identifying profitable opportunities within a compressed time frame. By pinpointing favorable entry and exit points, a gold trader can optimize significant trading profits. They scrutinize historical price patterns, support and resistance levels, and various indicators such as “moving averages.”
Gold traders also stay attuned to market news and fundamental factors that can influence gold prices. Economic indicators, geopolitical events, monetary policy decisions and even unexpected news can trigger volatility in gold markets. Being aware of these factors, in addition to technical analysis, can help traders anticipate short-term price movements and capitalize on them.
Short-term trading carries inherent risks, and gold is no exception. Volatility, liquidity constraints and sudden market shifts can lead to significant losses if proper risk management is not implemented. Traders must set clear entry and exit points, establish stop-loss orders to limit potential losses, and employ appropriate position sizing techniques to manage risk. Diversification, maintaining a trading journal, and staying abreast of news that can affect the gold markets are crucial aspects of effective risk management.
The gold market, like any other financial market, can be susceptible to price manipulation. Although regulatory bodies strive to maintain fair and transparent markets, instances of manipulation or insider trading can occur, impacting gold prices and affecting traders’ positions.
Gold is globally traded in U.S. dollars. If you’re trading gold in a currency other than the U.S. dollar, exchange rate fluctuations between your currency and the U.S. dollar can impact the value of your trades.
Currency risk adds an additional layer of volatility and risk to gold trading.
Trading gold using leverage amplifies both potential gains and losses. While leverage can enhance profits, it also increases the risk of substantial losses.
Additionally, margin trading carries the risk of a “margin call,” where you may be required to deposit additional funds to maintain your positions. This could lead to further losses if not managed properly.
It’s important to note that trading gold, like any investment or trading activity, involves risks. Traders should thoroughly research and analyze the market, use risk management techniques and consider their risk tolerance and investment objectives before engaging in gold trading or any other financial trading.
A short-term trader can make money as the price of gold rises, as well as when the price falls. You just need to be right when you decide which direction the precious metal is headed.
If you decide to trade gold, stick with your short-term trading plan and remember to stay the course!
Tim Tremblay is president of Tremblay Financial Services in Santa Barbara (https://tremblayfinancial.com).
