Gold and silver are the most actively traded precious metals and two of the most commonly used commodities that investors use to generate a view. Gold prices fluctuate with the U.S. dollar while silver has more industrial use and will trade in tandem with other base metals such as copper, and Aluminum. The best way to learn how to become proficient at gold and silver trading is to determine why they move fundamentally, and which technical analysis tools will help you predict future price changes.
Gold prices are quoted versus the U.S. dollar and are looked at by many investors as a currency pair. Gold prices fluctuate with the greenback, and even have a forward curve that is similar to the forward curve you would find when you trade a currency such as the EUR/USD. This means if you are interested in purchasing gold and plan on holding gold until some point in the future, the price you would receive if you purchased gold would incorporate the interest rate differential between U.S. interest rates and gold interest rates. Gold interest rates are calculated by using the gold forward rate or the gofo rate, and help provide a guide to future prices.
The supply and demand for gold is hard to measure globally. India is the largest consumer of gold and Australia; South Africa and South America are the largest producers of this yellow metal. This supply and demand component take a back seat to metrics such as inflation expectations along with hard currency expectations.
Many investors believe that gold prices are a hedge against future increase in inflation. Additionally, many believe that a decline in the value of paper currencies will make it more attractive to own a hard product such as gold. Gold traders perceive that the decline in riskier assets such as stocks will lead to a safe haven bid in gold prices.
Silver prices are also a reflecting of the value of the U.S. dollar since they are quoted in dollars similar to gold. The difference is that silver is used as an industrial metal and will benefit as growth increases across the globe. It is considered less of a safe haven assets and less of a hedge against changes in inflation expectations.
Both gold and silver are trades technically as well as fundamentally. Technical analysis is the study of price action. Traders will use past prices to determine the future direction of both gold and silver. The most commonly used technical analysis methodologies are based on the support and resistance of prices. Support reflects the demand for a commodity and is a price where further downward movement contracts. Resistance reflects the supply of a commodity and is a level where further upward movement decelerates. Many trades will also use patterns to determine futures price movements. There are both continuation and reversal patterns such as flag patterns and the head and shoulder pattern.
Gold and silver are the most liquid precious metals and provide investors with a way to take risk in the commodity market. By using a macro view of the dollar and technical analysis you can generate your own view of the future direction of gold and silver prices.