Gold is a precious metal that most of us know something about. Many of us recongize its value since we have at one point owned or bought an item made from gold. We understand that gold is something which maintains its value, even if it’s just from watching bank robbers steal bars of the precious metal in old movies
This familiarity is the reason why many traders feel most comfortable starting off by trading gold. Gold is considered a safe haven asset, and one which is expected to store value, oftentimes changing in value during periods of market volatility. Relative to other instruments like the Eurodollar currency pair or crude oil, gold prices tend to move more leisurely, but that doesn’t mean prices aren’t subject to volatility.
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Factors which move gold prices are quite simple to understand:
- Gold prices are likely to move in the opposite direction of interest rates.
- The dollar and gold tend to move in opposite directions for gold that is denominated in dollars.
- In times of economic difficulty or uncertainty gold prices tend to move higher, whereas gold prices are more likely to move downwards when an economy is performing well along with accompanying momentum higher in stocks
- Gold prices may move in the opposite direction the stock market
It’s rare that all these conditions will show up simultaneously, but if two or more are in play at the same time, it may be a good option to trade gold. Let’s provide an example of current conditions using these rules.
- At the moment, the US Federal Reserve has set interest rates quite low at 2.5%.
- The dollar at time of writing is trading close to a one-month high against a basket of currencies.
- At the same time, economists are worried about a global slowdown and there has been a breakdown in trade negotiations between the US and China, with new tariffs set to go into effect soon.
- The stock market is volatile at the moment. After reaching an all-time high early this month, more recently it has trended near multi-month lows.
You can see that the first point about interest rates is slightly supportive of gold. Additionally some analysts believe that there may be an interest rate cut before the end of the year. On the second point, an inverse correlation means that a strong dollar might push gold prices down. The geopolitical uncertainty caused by the trade war could also be supportive of higher gold prices.
Although gold is currently down by 0.12% at time of writing, the US dollar is up by exactly the same amount 0.12%. Ultimately, the value of the dollar may be having a greater impact on gold prices at the moment relative to other relevant factors.
While gold is the glamorous precious metal that investors are happy to trade, some overlook the value of silver and its own advantages.
Like gold, silver is driven by market demand and like gold it tends to move in the opposite direction of the stock market.
There are a few advantages that potentially make silver a better instrument to trade. To begin with, an investor can trade more silver with less capital. Silver is cheaper than gold so you get more “bang for your buck” trading it. At the same time, silver is more volatile than gold. This means that while a quick-thinking investor may generate higher returns trading silver if you are not well informed, there is a greater chance of losing your capital. Despite the slightly higher risk and reward profile relative to gold, silver is considered a safe-haven asset compared to most instruments during periods of market instability. Investors tend to invest both in silver and gold in times of recession or a market downturn, potentially driving prices higher.
When trading silver there are a few things to keep in mind:
- Silver is vital to many industries, so strength in the global economy tends to mean higher prices, since demand for silver should be consequently higher.
- Buying silver is counting on the strength of emerging countries, some of which experience prolonged political instability. Rather than keep their savings in currency, some prefer to invest in silver or gold to safeguard value. This characteristics tends to support silver prices.
- On the other hand, silver might fall if the dollar strengthens or if a greater slowdown in China and India materializes since demand for silver from these countries is relatively high.
Silver prices today
Just to give you an idea of how silver is trading in a historical context, the current price is close to a yearly low. This doesn’t necessarily mean a rebound may occur soon, but it’s worthwhile considering when investors will decide silver prices have bottomed out and start accumulating the precious metal again.