Gold Still a Long Term Play

December 7, 2012 at 08:51

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Gold may have lost its shine for many investors and traders over the past year, with its price failing to break convincingly through the $1,800 a troy ounce level. But last month’s re-election of Barack Obama as US president could boost the price of the yellow metal.

Gold and silver prices have been big beneficiaries of monetary easing by the leading central banks, such as the US Federal Reserve. Gold has also been buoyed by central banks becoming significant buyers in recent years.

Despite the quantitative easing, the price of gold has failed to rise significantly over the past 14 months. Since September 2011, the price has largely traded sideways between $1,530 and $1,800 a troy ounce.

The re-election of Mr Obama, and with him the likely continuation of the Fed’s loose monetary policy programme, has given some analysts and traders hope that gold will soon breach the $1,800 level.

The gold industry itself is cautiously optimistic about the coming year, to judge by opinion at last month’s annual London Bullion Market Association conference. More than 700 delegates predicted the price of gold would rise to $1,849 a troy ounce by the time of next year’s conference in September 2013.

After an initial bounce the gold price has stabilised at $1,730 a troy ounce, leaving some to question whether the price will remain in its sideways trade.

“There is the risk that additional monetary easing may not have a big impact on the price of gold or silver,” says David Madden, market analyst at IG.

“Over the past two years central banks have been only too eager to fire up the printing presses but, as with the boy who has cried wolf, recently traders have stopped caring.”

Some analysts are even advising traders to sell gold on any rallies. “We have already seen it hit tough resistance at $1,800 in recent months, which thwarted the bulls,” says Kathleen Brooks, research director at Forex.com.

“We urge patience on this gold trade, but we would expect $1,800 to be rejected yet again on any near-term rallies.”

Ms Brooks suggests leaving a sell order at just above this level to allow for any slippage. “At this stage, we aren’t confident enough to call for a downtrend, so we would look to take profit at $1,680 – a key support zone – and then try and play gold weakness in incremental steps, rather than in one hit,” she explains.

Fawad Razaqzada, an analyst at GFT Markets, says traders should also pay close attention to any announcements from central banks that suggest tighter monetary policy or anything that stands to lead the dollar to appreciate.

But traders and investors appear confident a gold rally is on the cards.
“Clients on the whole remain bullish, expecting there to be a test of last year’s all-time high around $1,920,” notes Simon Denham, chief executive of London Capital Group.

Mr Madden of IG says one strategy for investors would involve putting an order to buy if gold gets to $1,810 so as not to miss out on a break through this level.

Another strategy could be to spread bet on a longer-term option. “If you thought the price was going up you could spread bet on a call – or on a put if your opinion was negative,” says Mr Madden.

“The advantage of trading this way is you know your risk right from the start – the price paid for the option. The disadvantage is that time is working against you. If we don’t get a strong move, you run the risk of the option expiring worthless.”

Traders can also spread bet the price of silver, which some bulls believe could rise as much as 500 per cent over the next three years. Between June and October this year silver prices rose 50 per cent before falling back to its current level of $32.

Mr Razaqzada says silver has the potential to rally sharply, but he won’t be looking to buy until it clears and holds above the September high of $35.40.
“Once this condition is met, a buy around the $35.50-$36 area would look attractive to me with a target price of $40.50,” he says.

Risk management is important when trading silver as its price is much more volatile than that of gold.

“When trading silver, common sense comes into play,” says Mr Madden. “Spread betters should keep their positions small to allow them to ride out the volatility. They should also avoid placing their stops too close, since this could lead to them being caught out by a sudden but shortlived move.”