Strategies for Trading Gold During Inflationary Times and Rate Hikes

Introduction

In these times of inflation and unpredictable price hike, one asset has held out against trials of time-gold. It is considered a traditional hedge asset because it has retained its value over time. Due to its less predisposition to significant fluctuation, it has gained the reputation of safe-haven for investment. Its price movements barely depend on the prices of other assets. When the price movements of other assets move downward, the gold prices may hold or even increase. This makes it a safe option for preserving wealth in times of inflation and economic uncertainty.

Amid COVID-19, gold prices surged to all-time high. They are expected to rise to 2,200 $ per ounce by the end of 2025.

Key Factors Influencing Gold Prices

Although gold has maintained its value in the long run, it is influenced by various economic and geopolitical factors.

  •   Due to increase in global inflation and lowering of purchase power, investors tend to reserve their money in the form of assets that can preserve value. In these times, gold acts as a hedge against price increases. The rising inflation results in the central bank changing policies to stimulate the economy. These policies weaken the currency and increase the attractiveness of gold as an investment option.
  •   Geopolitical uncertainties and potential disruptions support gold prices due to disruptions in global supply chains and financial market turbulence. In such situations, investors choose to invest in less risky assets like gold.   
  •   As the Federal Reserve tightens its policies by increasing interest rates, this decreases the prices of gold as investors tend to prefer to hold cash or invest in interest-bearing assets. On the other hand, lowering the interest rates makes gold an appealing investment option.

Technical Analysis

Having a proper analysis is essential to make an informed decision and minimize the risk of potential losses. Technical analysis provides valuable insight into volume data and price patterns. Uptrend channels represent the upward price movements of the assets and help investors identify potential buying opportunities. Identifying key price levels based on historical actions help investors predict potential price increase.

The gold-silver ratio can serve as a useful trading strategy and can indicate economic market conditions. The highs or lows of the ratio provide valuable understanding to initiate undervalued positions and close the overvalued positions, respectively. The individual price trends of gold and silver can be compared to the gold-silver ratio trend to predict the reversal trend of one of the metals.

Key moving average indicators such as simple moving averages and exponential moving averages help identify trends in the financial market. Moving Average Convergence Divergence (MACD), a momentum indicator provides volatility insight.

Volume is another important component of technical analysis and predict the sustainability and validity of ongoing trend. A higher volume in gold price charts on up days and lower volume trends on down days indicate uptrends and downtrends, respectively.

Fundamental Analysis

Financial and economic factors tend to drive the change in the intrinsic price of an asset. Fundamental analysis involves monitoring the major global economies as it directly affects the purchasing power of individuals. When the inflation rate is very high, it creates turbulence in the financial market. Less consumer spending and international trade lead to low growth prospects.

Shifts in policies by Federal Reserve and other major central banks play a crucial role in influencing the economic outlook as they affect various asset classes and exchange rates. In times of political instability, gold prices tend to rise as investors tend to seek refuge by investing in assets that retain their value.

Trading Strategies

Traders use several trading strategies in gold trading that can help identify trends and manage risk effectively.

  •   Trend trading is a generally accepted trading strategy where traders watch out for breakouts and pullbacks. An upward price trend beyond a significant level indicates a breakout while a temporary reversal of this trend is a pullback and a potential opportunity to enter the trade market.
  •   Another popular trading strategy is range trading which involves making a trading move between support and resistance moves and avoiding trading activities near the boundaries.
  •   Investors also employ hedging demand trading strategy in times of geopolitical tensions to minimize the risk of potential losses. They tend to hold safe-haven assets like gold while making other investments. This increases their primary portfolio and preserves capital.

How to Increase Profits?

Following are a few time-tested strategies that can help you boost profit in trading.

  1. Start with a risk-free demo account such as the one offered by Vstar with demo funds worth $100k. This provides a great platform to practice trading skills without risking your real money.
  2. Continuously learn and educate yourself about trading techniques and strategies and stay updated regarding the financial market situation.
  3. For effective trading, develop a comprehensive plan that includes your strategies, goals, and objectives.
  4. Choose a reputable signal provider and subscribe to trading signals. Keep a record of signals and compare them to manual signals for validation. If they align, make an entry or exit move.

Risk management

For effective risk management, choose position sizes based on risk tolerance and account size. If the price trend is moving against your expectations, it is crucial to set a stop-loss limit while it is important to set a take-profit order to capitalize the profit when prices reach a predefined level. To reduce exposure to unexpected market fluctuations and lock in profit, entering and exiting in batches is a prudent approach.

Conclusion

  Even though gold has maintained its value over the long term but certain factors still contribute to the volatility of gold trading. This emphasizes that investors and traders remain flexible regarding their strategies in gold trading. Although the overall outlook appears bullish, there are short-term pullbacks that should be watched out for. Keep a balanced approach to monitoring market conditions and finding potential opportunities for successful trading.

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