Is Gold the Go-To Asset Right Now?

Do Binary Options Traders Have Clearer Direction with the Gold Price?

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There are some interesting developments taking place in the geopolitical arena. For starters, President Trump threw the cat among the pigeons vis-à-vis the Syrian crisis. Trump shocked the global community by reacting swiftly responding to a Syrian chemical weapons attack on civilians. He authorized the U.S. Navy to strike the airfield with 59 cruise missiles, while he was meeting the Chinese president Xi Jinping at Mar-a-Lago in Florida. On Friday, 7 April, gold and silver rallied in the aftermath of the Tomahawk cruise missile strike. As is so often the case with bellicose geopolitical activity, gold becomes the go-to asset for traders. Binary options traders wasted no time piling into commodities like gold and silver which spiked 1% on Friday. The US military action was in response to a purported chemical weapons attack on Syrian civilians. While gold rallied, silver also moved sharply higher (+1.02%) with the futures market showing a price of $18.432 per ounce. As often happens, WTI crude oil and Brent crude oil prices rose accordingly. Middle East unrest is often a catalyst for gold price surges, and that’s precisely what is happening.

Binary options gold trading tip: Developed markets set to be impacted by inflationary pressures

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The CEO of Sharps Pixley, Ross Norman, had this to say about the gold price and inflation: ‘… Prospects for inflation are rising all the time… Gold doesn’t work in lockstep with the inflation rate when it goes from 0.5% to 1%, when it gets to 3% you get a step change.’ This sentiment is shared with many commodities analysts who are seeing the inflation rate trending higher in the US. The multiplier effect of inflation on the gold price is evident since the 1970s. Recall that the oil price-linked inflation surge in the 1970s led to a spike in the price of gold. From 1980 onwards, the gold price shrank dramatically in Reagan-era USA, and the turnaround has only started taking place since 2000.

Another interesting relationship to take note of is the correlation between the gold price and the USD. Every time the USD appreciates, the gold price declines. This has been true over the past 17 years, with the inverse relationship holding true to the present day. The USD has been appreciating sharply since 2011, and in that time the gold price has plunged from over $1,800 per ounce to $1,250 per ounce. Presently, the USD is on the ascendancy as evidenced by the US dollar index which is now at 100.96, with a 5-day gain of 0.47% and a 1-year gain of 7.40%. Despite week jobs growth of just 98,000 new jobs in March (180,000 jobs were forecast), the USD has held its value and looks set to continue on its upward path.

Why is inflation such an important indicator for gold traders?

Inflation is a measure of how quickly prices are rising. When too much money chases too few goods and services, prices will rise. We are seeing the beginnings of this in the US economy, and the Fed is facilitating price rises by raising interest rates. In the past 15 months, there have been three 25-basis point rate hikes, and the federal funds rate is now at 1%. This is a natural catalyst to inflation. While the Fed may be trying to drain excess money from the US economy by paying to have that money stored, more money is being paid out in interest. This encourages investment and discourages credit spending, but gold is a natural benefactor of higher inflation.

The non-linear relationship between interest rates and the gold price works through the USD. As interest rates rise, so the USD typically strengthens (ceteris paribus), and demand for gold decreases. This is due to the high relative cost of gold to foreign buyers and the opportunity cost of holding gold which earns no interest. The average price of gold in 2017 is estimated to be $1,244 per ounce and the prevailing price is 8% higher than the early January price for the precious metal. For binary options traders, the inflation relationship with gold will be a little harder to trade, but there are quick and easy newspaper headlines to make the call or put options. For example, there are weak sales of gold bars, coins and jewelry, particularly in China where higher living costs are curtailing disposable incomes. This means that gold is fundamentally weak.

The uncertainty driving the gold price remains in place

As far as Syria, North Korea and Russia relations are concerned, that’s one big question mark for traders. One thing gold doesn’t like is exactly the thing that Trump delivers on: Uncertainty. Provided that remains, there is plenty of upside potential for the precious metal.