Trading Gold and Silver - When and Why to Buy Gold and Silver

In times of economic and political uncertainty traders are often advised to invest in gold and silver - the Precious Metals. But is this the right thing to do? Historically, investing in gold, silver or platinum was seen as a sure-fire way of protecting your wealth against the fluctuations in the economy during periods of political unrest or economic down turn. Gold still holds a special place in people's hearts as a means of 'storing' wealth during an economic crisis. However a closer look at the markets shows that buying gold during a financial crisis is not in fact the best option for people looking for a return on their investment. Indeed the smart investor only needs to take a look at the relationship between the gold and silver markets and the US dollar to spot the problem. Over the past 35 years there has been an inverse relationship between the value of the US dollar and these precious metals. Put simply, the price of gold rises when the US dollar falls.
The price of gold rises during political unrest as people flood the market wanting to protect their assets, but it falls when a financial crisis actually hits and the smart money heads for the safety of US Government bonds and hence buying the US dollar. Therefore gold is not the safe haven it is thought to be during a financial crisis. In fact comparisons of the S&P500 index and the gold market has shown that while the price of gold may rise in times of economic and political instability, driven by people opting for the 'safe' option, so too can the S&P500 index. For example in 1979 gold rose from $1,042 at the beginning of the year to $1646 by January 1980. During the same time the S&P500 index rose from 97 to 117. This was during a period when we had the Iranian revolution, the US embassy hostage drama in Tehran, the Soviet invasion of Afghanistan, a second oil crisis and subsequent high inflation, and political turmoil in the UK. When the stock market dropped by 19% at the beginning of 1980, so too did gold - falling 30% during that year. So investing in gold during times of political uncertainty is no better or worse than investing in the S&P500 index.trading.com
During the 1990s, in the wave of the technology boom, people invested in US companies rather than the gold market. This increased the value of the US dollar but had a negative impact on the price of gold. Then, when the technology markets crashed, and the US Federal Reserve lowered interest rates to zero, the price of gold started to rise. It continued to rise as the US dollar was further devalued when the US government started deficit spending and waging a series of expensive wars. In fact the largest trends in the gold and silver markets have been a decline since 1980 (when the economy was booming) until 2001, followed by a continuous rally as the Government has struggled to reduce its deficit and curb its spending.
Another consideration when dealing in the Precious Metals market is that although the prices of gold, silver and platinum are usually strongly correlated and move together, occasionally gaps appear. For example platinum had a huge rally in 2008 and silver fell behind gold in 2010. Despite these fluctuations the markets will usually stabilize and synchronize eventually.
The best way to make the most of your investment capital is to buy gold (or silver) when there is intense political and economic uncertainty. But as soon as the financial crisis actually hits, move out of gold and into the US dollar. Remember to always keep your trading capital to the strongest possible currency. It is worth tracking all the major currencies, including the Euro, the Australian Dollar, British Pound, Swiss Franc, Singapore Dollar and Canadian dollar, so you pick the strongest currency for your base trading capital. Whether you are trading gold and silver or not, tracking the weekly commitment of traders data will give you an overall picture of the strength of the US dollar and therefore the best opportunities for investment during a financial crisis.etrad.com