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Trading Gold’s Wild Ride

Gold futures have had an interesting week. They started out under $1,130 per ounce, skyrocketed up to $1,155, and now look like they are coming back down to reality. At the time of writing, they were at $1,148.60 per ounce and dropping. Where this will level out remains to be seen.

Even something as historically stable as gold is affected when markets seesaw like they have in the U.S. stock markets lately. Gold is one of those commodities that usually holds its value no matter what happens, but there is no denying the fact that it does have a very indirect correlation to the U.S. stock markets. Exploring this a little bit will help to illuminate what’s going on with the sudden volatility in gold futures.

First, notice that I wrote “indirect” and not “inverse.” An inverse correlation means that when one goes up, the other goes down. This is an indirect correlation, meaning that they tend to move together, but the reasoning why they do this is a bit of a stretch when it comes to trying to correlate the two together. The relationship between the U.S. dollar and the price of gold is an inverse one because they tend to move in opposite directions of each other. They are both seen as safe places to put your money when the markets are unreliable, but they change in which one is the strongest at times, hence the inverse nature. There is also an inverse relationship between the stock market indices and the U.S. dollar, so what has ended up happening by default is that when the U.S. markets are strong, gold rises, too. It’s not immediate and they do not move in lockstep, but they are pretty similar in nature much of the time.

So, when the stock market is unpredictable, gold can be unpredictable, too. Unlike the dollar and some stocks, though, gold is viewed as a long term investment. While a wild dollar can be problematic to day traders, wild gold is just a little hiccup in a long term process. You can trade gold, and this is what many binary options traders like to do because of its stable upward trend, but during times like this, it’s usually best to stay away from it. There are indicators out there for gold futures, but the short term trades that you are used to making with stocks and currencies are not nearly as accurate with commodities, and especially commodities like gold, silver, platinum, and other lesser traded items. Oil is really the only commodity that gets enough action to make trades of shorter than 15 minutes predictable enough for someone to actually profit off of them.

Yes, when gold is dropping like it has been doing several substantial times over the last few days, going short on your trades with it can be alluring. This isn’t the right choice most of the time, though. Even if you do make money from these trades, the odds are that you made money more because of luck than because of your superior predictive powers. The issue is that if you look at a chart for the last five days, although gold has spent a lot of time falling in value, its overall price has actually gone up. December 2015 futures contracts have risen by more than $20 per ounce. That’s a huge amount of change over a short period of time, and it’s overall positive. Going short during this timeframe would have been very dangerous. You would have had to have perfect timing, and your timeframes before expiry would have needed to have been spot on. It’s just too risky to do well.

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