Since reaching an all-time high of more than $2,000 per ounce in August, gold has been trading in a downward channel, with average daily price movements of around $30.
Golden FX Link Capital chief financial adviser George Black shared some of the factors affecting the direction of gold going forward and how traders can profit on the volatility.
The first thing to consider is inflation, which is the weakening of a currency’s value.
According to top economists in the research division of the Federal Reserve, the 10-year break-even inflation rate is currently near a five-year high.
This means that market players anticipate a high level of inflation over the next 10 years.
Forty per cent of all US dollars in existence have been printed in the past 12 months, an unprecedented amount of money printing, the effects of which will soon penetrate into many areas of the economy.
Gold is a hedge against the effects of inflation, and this is one factor that will contribute to the stabilisation of gold at these higher price levels.
Gold does not pay interest, however, and US Treasury yields are rising, which will cause some investors to transfer funds from gold assets into US bonds.
As the US economy recovers and the economic outlook strengthens, more selling pressure may be seen as gold speculators take profit and evaluate the new environment.
This could temporarily curb the bigger up-trend in gold, as investors will want to take advantage of the higher interest rates of the more attractive US government bonds.
The best angle to profit in these conditions is by day trading gold using the average daily range.
Buying gold is recommended at $1, 690 per ounce, setting the take-profit function at $1,830 per ounce and the stop-loss function at $1,650.
However, traders can look for $30 daily jumps in gold to enter a short position and keep a tight trailing stop on the retrace.