Gold Trading Strategies

With the price of gold hitting all time highs many traders are wondering if gold trading is a great way to be able to make additional profits. One way that this can be done is through the trading of the gold futures contract. This is where you are speculating that the price of gold will rise or fall in the future. Historically speaking gold has been a great long term investment during times of economic uncertainty or crisis. Given the fact that the world is currently in a financial crisis and you have many different international tensions flaring gold is showing why it is such a great investment during times of great challenge.

The ratio of gold vs the gold sector has exhibited a fairly strong contrarian tendency. The following graph shows the results of two strategies, the first (green) going long gold at today’s close if GLD underperformed XAU for the day, and the second (red) going long if GLD outperformed XAU, frictionless from 2005 to present.

Inflows into gold-backed exchange-traded funds dwindled in the third quarter as investors switched their interest to other products, with the holdings of six funds tracked by Reuters rising only 1 percent. The six — the SPDR Gold Trust, ETF Securities’ ETFS Physical Gold and Gold Bullion Securities, and products operated by Julius Baer, Zurich Cantonal Bank and iShares — saw inflows of just over 697,000 ounces in Q3, against 995,000 ounces in the second quarter.

Most of the strategies that I talk about on this blog could be traded using leveraged mutual funds (not to be confused with leveraged ETFs). These are the only thing that I trade. Because they incur no transaction fees or slippage, most of the tests I’ve performed on this blog could have been duplicated, for all intents and purposes, as well in the real world.

Investors using fundamental analysis analyze the macroeconomic situation, which includes international economic indicators, such as GDP growth rates, inflation, interest rates, productivity and energy prices. They would also analyze the yearly global gold supply versus demand. Over 2005 the World Gold Council estimated yearly global gold supply to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of 105 tonnes. While gold production is unlikely to change in the near future, supply and demand due to private ownership is highly liquid and subject to rapid changes. This makes gold very different from almost every other commodity.