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Home / Special Reports / Gold down 40% – Time to Buy?

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

2 December 2014

Gold down 40% – Time to Buy?

Popularity from many sources

The yellow metal has become one of the most popularly traded commodities thanks to its meteoric rise from lows of $250 at the turn of the millennium to $700/oz when the financial crisis was born mid-2007 and highs of $1925 by mid-2011 when worries about US Subprime defaults were replaced by fears ofEurozone sovereign collapses and the future of the Euro.

Despite having no real worth in its raw form and providing zero income it is still considered a long-term investment (physical holdings), a hedge for inflation (which central banks want to kick-start struggling economies; China, Europe, Japan) and a port in a storm (store of worth, safe haven) in times of crisis.

Meteoric rise

The metal’s price is driven by both physical demand(jewellery, long term investment) and speculation with the latter dependent on sentiment towards global meltdown and how the US Dollar will move (commodities denominated in US dollars) in relation to demand for the world’s reserve currency and perception of US monetary policy direction.

Impressive volatility

From its all-time highs the metal has delivered impressive volatilityfalling over 40% as central bank stimulus (US and peers) helped push equities to recover strongly, denting safehaven demand.

While the much-feared inflation from said stimulus has failed to emerge, reducing the need for a hedge and the US Fed has exited its stimulus programme (US economy doing better), moving towards more normal monetary policy resulting in a stronger USD making Gold more expensive to buy, major peers in Japan, China and Europe have kept the liquidity taps open, hence equities still rallying.

Tarnished metal? Or just needs a polish?

The recent rout in commodities, fuelled by sharp falls in the price of Oil (also tradable in the same way as Gold) as the US and OPEC play chicken in terms of rising supply versus uncertain global demand has seen support for Gold emerge at $1150 helped by the USD coming off its highs on uncertainty about US growth and a 2015 US rate rise being as close as thought, as well as some short covering and bargain hunting at these new multi-year lows.

Could this pause and retest of $1200 present a long-awaited buying opportunity with upside potential to abandoned highs of $1400 or higher? Or will the downtrend persist, taking us all the way back to $1000 or even below, offering a short-selling prospect?

Gold (Spot Gold 2yr history); 1-month -2.7%, 3-month, -6.4%, 2-years -29.7%

Spot Gold (-)

Will the price rise towards 2011 highs of $1920 or will it fall below recent lows of $1130?

Technicals: While Gold remains in a downtrend from 2011 highs and for 2014 as a whole, the recent test of $1150 shows for the first time in a while a pair of rising lows, which would help in delivering a recovery, although 2014 falling highs are a hurdle to overcome.

Your Trading Options Today

Whether you see the price of Gold going up or down in the short-, medium- or long-term, one thing is for sure - tradable opportunities will present themselves regularly. Below are some examples to help you profit from future moves in the price of Gold.

OPTION 1: Spot Gold (works like an Index trade)

Trading the spot price of Gold involves a margin requirement of 0.7%. Deal sizes on the platform are for contract sizes to the value of $100 per point. Each point equates to each whole dollar movement in the price. For example, if you were long of Gold and the price moved from $1195 to $1200, this is a 5 point movement or a $500 gain. We also offer mini contracts based on $10 per point movement.

Deposit/Margin:

For one contract ($100 per/point) on Gold we require $837.50 (£530) as a deposit. For one mini contract ($10 per/point) on Gold we require $83.75 (£53) as a deposit. You can trade multiple contracts, in either direction: long or short.

OPTION 2: Gold ETF (acts like an equity)

An alternative is to trade the Gold ETF which works like a share and requires a 10% deposit. The ETF is like an index of Gold mining companies providing you with exposure to Gold related equities rather than you having to pick individual companies. Just like a stock you can go long or short and take any size position you feel comfortable. Currently the ETF trades around $14.70 per share.

OPTION 3: Gold equities

The final way to trade gold is to trade gold-related equities such as Randgold Resources (RRS)Acacia Mining (ABG; previously called African Barrick Gold), or Fresnillo (FRES) amongst others. Just like shares, the margin requirements will vary from 5%-25% depending on whether they are FTSE 100 or AIM listed shares and, dependent on circumstances, they can be traded both long or short.

Note: Other precious metals like SilverPlatinum and Palladium as well as Industrial Metals (Copper, Aluminium, Lead, Nickel, Tin, Zinc), energy (Natural Gas, Oil) and soft commodities/foodstuffs (Cattle, Wheat, Sugar, Cocoa, Coffee, Corn, Cotton, Lumber, Soya beans) can be traded in similar ways to Gold so speak to us if these are of interest to you.

Before taking positions in Gold, ETFs or Gold stocks, be sure to contact Accendo for…

  • Updates - How do things look in terms of investor/market sentiment? News and broker updates can emerge daily affecting prices. Optimism can switch to pessimism in the blink of an eye depending on what’s going on around the world.
  • How to use CFDs and Spread Bets to maximise your profit potential.
  • How to use the tools available to minimise the risk involved.

To find out what makes Accendo Markets stand out from the rest…….

The Accendo approach – what’s different?

At Accendo Markets we don’t tell you what to do. It’s your call whether you buy or sell. Our aim is to provide the help you need highlighting opportunities which may be profitable to you, the trader, and assist you in making trading decisions from which you can benefit by the use of leveraged instruments.

Our approach focuses on 3 elements below;

  • Education – not obligation
  • Observations – not recommendations
  • Assistance – not persistence

Our unique and award-winning service provides you with the help and tools you need to make appropriate trading decisions in the financial markets, both to grow and protect your capital.

CFDs – A simple way to increase profit potential

While traditional Gold shares require the full amount be paid up front (e.g. 5,000 shares at 200p, would require the full £10,000 outlay) an identical trade using CFDs involves an initial outlay from just £500 (CFDs require deposits from 5%). The outlay is lower but the risk and reward are the same as if £10,000 of shares were held.

The CFD trader benefits/suffers to the same extent as the traditional shareholder but has the advantage of not having to part with the full amount at the outset. He also saves on stamp duty as there is no physical purchase. Best of all, the CFD trader can take a positive or negative view.

Should you not be interested in the leverage advantage of CFDs but do wish to purchase shares, you can always treat CFDs like shares (also avoiding stamp duty). Simply deposit the full value of the share position you would like to take (i.e. £10,000) and take an equivalent CFD position (note that overnight financing costs will still apply).

Think the shares will rise? Take a long position by buying the CFDs. Think its shares will fall? Take a short position by selling the CFDs. For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios click here.

Beware that the combination of CFD leverage and bigger share-price movements (volatility) can result in bigger than expected losses which can even exceed your original deposit.

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For any questions on how to trade Gold, ETFs or Gold Stocks via CFDs or shares, including ways in which your risk can be managed, call us to discuss on 0203 051 7461

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Open a Demo account CLICK DEMO     

Subscribe to a Free Research trial CLICK RESEARCH

Apply for a Live Account CLICK ACCOUNT

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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