Like so many others, I routinely revisit the question as to whether gold is a buy or a sell during my trading sessions. Gold is an important precious metal, given that it is stored by central banks the world over and it is the go-to financial asset when equities markets turn sour and currency weakness pervades the markets. Consider for a moment that paper money has little or no value during inflationary times, but gold has a value in that it is a store of value. True, gold does not earn any interest, which is precisely the reason why an interest-rate hike by the Fed would be bad for gold.

Gold surges when equities markets falter. As such, I do believe that gold has an important part to play in the financial portfolios of everyday investors. However, if you were to include gold in your financial portfolio, the IRS would be taxing you at 28% since gold is a collectable item, and unlike equities which are held for more than a year prior to being sold, the tax on gold is significantly higher. This is an important consideration to bear in mind if you're considering holding physical gold stocks or purchasing gold shares.

However as a binary options trader, you can speculate on the future price movements of gold without being subject to these tax constraints. The value of gold is predicated on fear and uncertainty. When the equity bears come out to play, this bodes well for gold. As you can imagine, the US economy is doing particularly well now in comparison to the global economy, so it makes sense that the gold price is rather suppressed. In the aftermath of the global financial crisis, it is apparent that equities market weakness resulted in a surge in the price of gold.

Important Relationships with Gold and other Precious Metals

However, I would like to dispel the myth that gold is a hedge against inflation. If you look at the data over time, it is evident that this relationship is spurious at best. The return on gold during times of high inflation is not correlated in any meaningful way, or vice versa. The assumed positive correlation may well have been true in the 1970s – not anymore. Owning gold certainly has its benefits in a bearish economy, but there is no need to actually take possession of physical gold stocks to benefit from the gold market.

There are all sorts of ratios and metrics that people look to when investing in gold and other precious metals. For example one of the most common ratios is the gold/silver ratio. I like to use this metric to gauge undervaluation or overvaluation in either metal. The typical operating procedure in this instance is to buy the undervalued metal and to sell the overvalued metal. Of course long-term, there is always reversion to the mean. Another ratio that I find particularly useful is the gold/platinum ratio. This is less common, but an equally viable investment opportunity.

All three precious metals are used for jewelry, but platinum has widespread industrial applications – making it highly valuable in that regard. The price of platinum has plunged in recent times, as most people will recall platinum being far more expensive than gold. During September alone, the price of platinum plunged by 10% on the back of the VW (VLKAY) scandal. Earlier in October it was trading at $900 per ounce and the gold/platinum ratio became 1.26. This reversal in precious metal valuations is an important one to bear in mind because now, gold is the platinum of old.

Global economic uncertainty has caused widespread declines in the price of precious metals. China – despite its weakness continues to purchase copious amounts of gold to add to its reserves. This is yet another reason why gold has appreciated so strongly relative to platinum. Consider for a moment that the price of platinum was trading at $2,200 per ounce 5 years ago, and now it is just $984 per ounce. Gold is currently trading at $1141.70 per ounce and silver is trading at $15.54 per ounce.

There is no doubt that the worst of the commodities meltdown as a result of China weakness has yet to fully impact on precious metals like gold, silver and platinum. With declining demand in China, and a potential contraction in the US economy in the future the price of platinum will decline sharply. Gold on the other hand will move in the opposite direction. So the gold/platinum ratio will increase – in other words for every ounce of platinum, you will be able to buy less and less of gold.

My advice to commodity traders is simple: Hold your gold assets, or go bullish on gold long-term. Gold is an insurance against market instability, and despite some positive developments taking place in the Asia-Pacific region and the Eurozone we have not seen the bottom of the commodity rout just yet. Will the price of platinum exceed the price of gold? Probably, but we are far away from that taking place any time soon.

Let's consider what the recent Fed decision in October means for gold. The fact that the Fed decided against hiking rates would typically be viewed as a bullish sign for gold. In other words gold should have surged on the back of the decision not to raise interest rates. However the viability of that decision was tempered by the fact that the Fed neglected to make any mention of the global economic slowdown in its statement. In other words the Fed clearly left the door open for a rate hike on December 15/16. This acted contrary to any bullish sentiment that the Fed’s decision had on the price of gold.

This time around, we didn't see equities markets plunge after the Fed decision since there was no mention of the threat of the Chinese economic slowdown. Commodity traders were expecting the price of gold to rally after the Fed decision, and in the lead up to the decision it did. Gold was trading at $1182 per ounce, but within minutes it had plunged to its lowest level in 2 weeks – $1152 per ounce. Many analysts were expecting the gold price to move beyond $1200 per ounce by the end of 2015, but my expectation is that the price of gold will close out the year in the region of $1000-$1100. Clearly exchange traded funds and hedge fund managers were expecting the price of gold to rally after the Fed decision – that didn't happen.

Therefore in summation: Binary options traders might consider placing put options on gold as we approach the next meeting of the Fed FOMC in December. Barring an economic collapse, a Fed rate hike is going to send gold lower since there is no interest to be earned on gold.