Are the Bears Out in Full Force for Gold?

 

As at Tuesday, gold was trading at $1,216.63 per ounce. The recent performance of the precious metal is such that its performance over 30 days, 6 months, 1 year, and 5 years is negative. In fact, the bearish sentiment around gold bullion is pervasive. For binary options traders, this may appear to be a straight shot at put options. A caveat is in order: short-term price fluctuations in the price of gold are all too common. It’s important to evaluate the intraday price movements to ascertain what factors may cause temporary spikes or drops in the price of gold.

How did gold react to the French election?

The French election was a hard-fought affair between a handful of candidates, notably Le Pen and Macron. On the one extreme, markets were exceptionally nervous about the possibility of a far-right victory. This would jeopardize the unity of the European Union, and possibly entice other countries to adopt similar measures. After populism triumphed in the US, pundits were a little nervous about the French election. That anxiety proved beneficial to gold which rallied between 10 April and 20 April. While the gains in gold were not solely attributed to the French election (North Korea played a part), it was a big factor in gold’s sudden rise and demise.

Now, gold is fast approaching a critical support level around $1210 per ounce. Recall that gold bottomed out to $1,127.80 per ounce on 15 December 2016. We are nowhere near that level yet, but we’re certainly on the downswing after 4 months of steady gains. With the uncertainty removed from the French election, traders and investors no longer see gold as a viable option. Gold futures indicates net short positions on the metal. While Macron won the election, it’s not clear how effective he will be as a leader since there is a parliamentary battle for seats. This works in gold’s favour.

How does the strength of the USD affect the Gold Price?

Gold is priced in US dollars. We know that a strengthening US dollar is a bad omen for the gold price. Why? Foreign buyers of the precious metal will be required to pay more for the equivalent quantity of gold when the dollar is appreciating. This inherently means that those buyers will have to work with unfavorable exchange rates. One of the best measures of the USD is the US dollar index. Currently, the US dollar index (DXY) is priced at 99.60. The higher this figure, the stronger the USD and the greater the effect on gold.

A strong dollar can also have unintended consequences for the gold price. For example, when the Fed announced interest rate hikes earlier this year, everybody was expecting the gold price to fall. However, the Fed’s indecision to commit to multiple Fed rate hikes led many to interpret that as uncertainty. The gold price rose. Remember, it’s not always what is said in an economic data release – it’s what isn’t said as well. As a binary options trader, it’s important to look beneath the surface of good or bad results and see how that information may affect a commodity like gold.

What Should Binary Options Traders do with Gold?

Let’s take a quick look at the general trend of the precious metal. It is bearish. Put options appear to be the right decision, given the performance of the precious metal over time. If we look beneath the surface, it is clear that within the past month there have been sharp increases in the gold price, followed by precipitous declines. Therefore, a comparative static over a period of time is pretty much useless for anything other than long-term trend analysis.

Over the short-term, it is clear that gold is a highly volatile commodity which is extremely sensitive to the USD, economic data releases from the ECB, BOE, BOJ and the Fed. As a binary options trader, consider the economic data announcements from central banks like the Fed, the Bank of England, the European Central Bank, and the Bank of Japan. These are the short-term determinants of call or put options for binary options trades on gold.