Investors who trade precious metals understand that prices will not remain constant no matter how stable they may seem. The basic principle that governs any investment is profit-making through differences in buying and selling prices. For some instruments in the investment markets, prices are more volatile. Scalping traders like volatile instruments as they make it easy to make quick bucks.
Gold is one of those volatile instruments. Proper gold analysis is of the utmost importance for any investor who is keen and wants to keep control of the trades they make.
Gold prices are mainly driven by the markets’ demands and supplies. However, there are other influencing factors that drive investors’ confidence in trading gold, and dictate the movement of the commodity’s price.
Risk and Uncertainty
Most precious metals investments thrive in times of market uncertainties and risks. Gold is one of the biggest beneficiaries of market turbulences. Risk in gold trading is usually presented in price movements, whereby investors tend to sell off and refrain from buying more gold when prices are moving downwards. Market price predictions offer a glimpse of future gold prices, and although they are not completely accurate, future price predictions greatly affect the investor’s confidence in the commodity.
On the other hand, a bullish gold market offers more opportunity to sell gold bars in Rochester MI and get more money for the same amount of gold previously held. Selling gold when it is still in a bullish momentum is referred to as “Trading the retracement.”
The upward movements in prices restore confidence in gold as an investment instrument.
Value of the Dollar in the Financial Markets
The US dollar is the most traded currency in the forex market, and acts as the baseline for market prices. Most investment instruments and commodities are valued in terms of dollars. A stronger dollar is unfavorable for gold prices as less gold will be purchased. The weaker the dollar gets, the more gold you can buy, and this drives gold prices upwards.
A weaker dollar reduces consumer confidence on the currency. Thus, the consumer will opt for other forms of investments to hold and preserve the value of their wealth.
Opportunity Costing and Interest Rates
Interest rates have been by far used by the central reserve banks to control monetary circulation and inflation. In the recent past, interest rates have been on the rise and have reduced the investor’s confidence in holding any hard currencies. Higher interest rates attract higher swap commissions on electronic trades, which motivates the investors to let go of their previously held gold investments.
Opportunity costing in gold investment means opting to invest in a different commodity in the market that is doing well, whilst gold prices are on a downward trend. Some investment commodities, such as oil products, are favored by high interest rates. Thus, investors will sell gold bars in Rochester MI, and invest the money in oil, as trading oil will present a more lucrative investment opportunity at that moment.
For day traders who do not hold physical gold, higher interest rates present an even better opportunity to sell short the commodity and buy it back once prices start moving up again.
Market Sentiment and Momentum
The momentum of a commodity refers to the tendency of its market prices to rise or fall continuously due to artificial market manipulation. When gold prices are moving up, investors hurry to buy more. The news is hyped up, and more traders join in on the ride, which further drives up the prices, creating positive momentum. As the upward momentum wears off, investors exit their trade positions, and the prices start moving downwards. Fear of losses will drive gold prices further downwards, creating a negative momentum.
The rapid price movements are not favorable for the long-term trader, but are an ideal environment for swing traders. The swing and long-term traders’ market perspectives are greatly affected by price momentum.
Conclusion
Gold prices are more stable and will continue to attract more investors in the future. Other than demand and supply, other underlying factors explained above should not be ignored. How the investors feel is very important in determining how the market prices of a commodity will move. Therefore, you should investigate the markets for alternative investment commodities that you can trade when the market is unfavorable for gold trading.
