Trading gold on the Comex has entered a new era as gold futures rose over $1,600 an ounce recently. As twin debt crises plague the two largest economies in the world investors are looking for safe havens as a means of hedging investment risk. Trading gold has always been a means of hedge inflation risk and a refuge in times of political crisis, economic chaos, and war. Gold bullion futures are traded on the Comex, one of two branches of the New York Mercantile Exchange, NYMEX. Billions of dollars of precious metals, agricultural commodities, and energy products are handled by the NYMEX. The Comex, where the precious metals such as gold, silver, platinum, and palladium are traded, sets prices which are then followed throughout the world. Trading gold on this market can be very profitable and also carries the risk of loss. Successful traders learn the fundamentals that drive gold prices and keep abreast of news that affects gold prices. For many the more important information for trading gold futures is the price of gold bullion itself, or the price patterns that evolve as the market moves from minute to minute, hour to hour, and day to day. Profitable futures trading typically requires both fundamental and technical analysis of gold prices and the factors that drive these prices.
The smoldering sovereign debt crisis in Europe has engulfed Greece, Portugal, Spain, and threatens to affect Italy. Lenders are demanding austerity measures in these nations in return for continued loans. Bond rates are setting records as investors demand higher and higher interest rates in return for the risk involved. The US Congress is involved in a seemingly endless drama to see who can score the most political points become coming to an agreement to raise the US debt ceiling and avoid default the US $14+ Trillion debt. In this environment trading gold has become an attractive option to more and more individuals. We see increasing information about how to trade the gold silver ratio and other strategies for profiting from trading gold or other precious metals. Traders can buy or sell gold futures contracts directly or they can buy or sell options on futures contracts. Buying options is often the more popular route for traders as it limits risk and provides a way to leverage investment capital. Writing options on futures contracts is commonly more profitable that buying options but entails the risk of occasional very large losses. Thus trading gold via selling options contracts is typically limited to large institutional investors with very deep pockets.
In trading gold investors need to retain a sense of history. Gold was pegged at $32 an ounce from the end of WWII until 1971 when the US went off the gold standard. It rose to over $600 an ounce in 1980 until falling precipitously to the $200 range where it remained for twenty years. The current price of gold is based in part on fundamentals and weakened economies and in part on fear of a global financial meltdown. If a trader gets caught in a highly leveraged futures position just as EU and US officials solve their debt dilemmas trading gold could be the least profitable trade of a lifetime. In short, watch technical analysis and hedge risk with options is often the best advice.
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