When Do Price Indicators Signal an Investor That it is Best Time to Sell Gold from a Long Perspective?

4/4/2012

For a gold investor it is critical to know when to sell gold in order to preserve profit and end up on the positive side of investment gains. The gold trade is extremely popular due to its increased predictability compared to other investment vehicles. The reason the gold market can be predicted to some degree is the various ways that one can use it in order to tell when the gold market is topping. When one knows when the market is topping then they know when the best time to sell is. As with any investment you want to buy low and sell high. Gold trading for currency gives investors this ability on a regular basis and that is why it is such a profitable form of trading if done correctly.

Gold Market Indicators & Influences

- Interest Rates

- Inflation

- Real Interest Rates

- Australian Dollar

- Canadian Loon

- The Federal Reserve

Interest rates have been a historic indicator of gold prices. Historically, when interest rates have increased the price of gold has decreased. Interest rates are indicative of the state of the economy and stock market. Rising interest rates indicate a hot market. A gradual increase in rates is used to prevent inflation. Fixed income instruments then become attractive against gold. Therefore, one can infer that increased interest rates will likely drive down the price of gold. However, this is not always the case and interest rates should not be used as a sole indicator/predictor of future gold prices. This trend in gold price does not always follow it's historic pattern, but it is fair to say it usually does.

Inflation can be used in conjunction with interest rates to give a clearer outlook on what the future may hold for gold prices. When inflation increases, the price of gold also increases. This is referred to as a direct relationship. There is a direct relationship between what gold trades for and inflation. It is important to understand that inflation is the increase in money supply, or easy money. Many investors are unaware of this important aspect. The real key to look for though is a decrease in inflation rates. This may be a huge sign that the gold market has topped and it is time to sell.

Real interest rates are believed by many to be a better indicator of the behavior of gold prices than inflation and interest rates. The real interest rate is calculated by taking the normal interest rate and subtracting the rate of inflation. For example, if the stated government interest rate on 30 year Treasury bonds is 4% and inflation is running at 2.5%, the real interest rate is 1.5%. Essentially this is just a way to put a numerical value on the correlation/relationship between the inflation rate and interest rate. It is also sometimes referred to as the true interest rate. When the real interest rate is a positive number, gold is expected to perform poorly. When the real interest rate is a negative number gold is expected to perform well. Positive real interest rates after a period of substantial gains is a huge indicator that the gold market is topping and it probably signals a great time to sell.

Currency comparisons between the value of another country's currency versus the price of gold can be great indicators of a topping gold market as well. The value of another countries currency is related to and influences the price of gold. Therefore, you can use the currency value of other countries to make educated predictions on the future behavior of gold prices which may signal a good selling or holding opportunity.

The Australian dollar is a currency that has a big impact or correlation on the prices of gold. Australia is the world's third largest producer of gold. By comparing the price of the Australian dollar vs the price of gold you can make some inferences on whether or not the gold market is topping. When the Australian dollar increases in value so does the price of gold. Therefore, a decrease in the Australian dollar can be a signal that it is time to sell. The relationship between the Australian dollar and gold prices is direct.

The Canadian loon is another currency that can give clues to the future behavior of gold prices. When the Canadian loon goes down, so does the price of gold. Therefore, if the value of the loon starts declining you can infer that there is a good likelihood that the price of gold will shortly follow in this downward pattern. Canada has one of the largest gold industries in the world and their influence can definitely be felt on the global markets.

The Federal Reserve has an influence on the price of gold as well. When the Federal Reserve announces that they will be accommodating - zero percent interest rates- or central banks are actively buying gold, you can expect the price of gold to instantly go up. This creates a greater demand for gold which will make it more valuable.

When gold increases in retail sale value you can expect the price of gold currency will increase on the global markets. However, there is a seemingly contradictory point with respect to retail sales. Some people believe that when retail "investments" become in great favor with the professional stockbroker community (gold backed CDs, fixed income instruments that guarantee payoff in gold, etc), it is time to consider selling gold. This is a contrarian view, namely that if everyone including brokers think an investment is good, it might be time for a big correction down. This may be something to consider, but only after all the other indicators have been checked.

The Fed's comments should be heavily factored in your decisions with gold currency trading. Their decisions directly impact the global markets. Factoring in their comments with interest rates, inflation, real interest rates, the Australian dollar, and the Canadian loon should help you make an accurate assumption on the gold market topping.

Since there exists no gold exchange standard in the world today due to the fact that no currencies currently can be exchanged for gold, many people have been re-entertaining the idea of a convertible currency. Tying paper currency to the value of gold by allowing it to be exchanged for gold can lead to more confidence in a currency, and, it allows citizens who are afraid of inflation to exchange for the king of precious metals. Gold holds its value despite what governments might due to fiat (or non precious metal backed) currencies. Places where gold can be bought and sold are also referred to as gold exchanges.

To emphasize the importance of the gold price today, in 2012 the Republican Presidential Platform is encouraging the formation of a gold committee to review the possibility of returning to a gold standard (or even a partial gold standard). Selling gold in the market today can be very rewarding, but due to the relatively fast moves gold can take, it is not a subject to be taken lightly.


Gold and Silver Money vs. Paper Currency

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Ironstone's "Crown" Jewel, the 44 lb. crystalline gold specimen, the world's largest. On display to the public at Ironstone Vineyards, Murphys, CA
Ironstone's "Crown" Jewel, the 44 lb. crystalline gold specimen, the world's largest. On display to the public at Ironstone Vineyards, Murphys, CA | Source

When to Sell Gold: Is a Parabolic Move the Time?

© 2012 John R Wilsdon

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Comments 9 comments

john000 profile image

john000 4 years ago from Superior, Arizona Author

Appsthatpayyou-

Thank you for commenting. These days with the volatility of the precious metals market, it's good to know a few basics. Thanks again.


john000 profile image

john000 4 years ago from Superior, Arizona Author

This article was intended for a person using a fundamental approach. Trading Forex using Fibonacci numbers, RSI, MACD,oscillators, etc. is highly technical and requires quite a bit of study. I agree with what you had to say about different ways to approach selling gold. I also think that virtual cash on many Forex sites is a good way to practice before starting the fast game. I have traded Forex, and my personal preference if a reader is inclined is to use Oamba. They have the lowest rates for pips, they allow you to put up any amount of money for a trade (no minimums), there accounting is great, and they are one of the soundest companies financially. I have no monetary interest in Oamba at all, and haven't traded Forex in 2 years.


f_hruz profile image

f_hruz 4 years ago from Toronto, Ontario, Canada

How you should be trading gold, or anything else for that matter, depends on your trading strategy.

If you buy your investments for cash, you can trade your position based on fundamental data, but if you take a leveraged long or short position by using margin, as in the case of future trading, you better use a technical trading system based on price forecasting, trend following and trailing stop loss orders or your losses may wipe you out before you even know what happened.

Leveraged trading strategies can be highly profitable when entry and exit points are well defined, and losses are kept small in relationship to profitable trades.

If you like to try some of these strategies with real-time data in an account funded with $25,000 virtual cash, just go to ... http://as100.webs.com/500/ - it's free!


ladysonoma profile image

ladysonoma 4 years ago

My favorite hour to trade fx is about now. Right about London Open. Oh well... think I'll go to bed instead...lol.


john000 profile image

john000 4 years ago from Superior, Arizona Author

Actually, the value of the dollar is a good indicator. The biggest rise in gold price has been since the dollar fell in 2008. But lately the dollar has strengthened against other currencies while gold fell a bit - it still remains a safe haven given the situation in the rest of the world. I would say the dollar is a good indicator if you think a trend is in store. Thanks for your comment.


john000 profile image

john000 4 years ago from Superior, Arizona Author

Hello Theeyeballkid,

I think you are probably right. Recently we have had a small pullback, but with an economy like Europe in such sad shape and no end to easing, I think it is safe to say gold still has legs. Thanks for the comment.


The Cory Column profile image

The Cory Column 4 years ago from Bay Area, California

Very well articulated


Theeyeballkid profile image

Theeyeballkid 4 years ago

Very informative hub, this sets out very clearly what the main drivers for the price of gold. I still think the gold bull market has a way to go yet. Its hard to see how fiat currencies will strengthen vs gold when politicans and central bankers only solution to the debt crisis seems to be to print more money.


ladysonoma profile image

ladysonoma 4 years ago

Interesting. I thought you just sell gold when the dollar starts to go up again. I never knew of looking at interest as an indicator, other than just for short selling. Shows what little common people, like myself, know.

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