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What Is The Stagnant Gold Price Telling Us?

Commodities / Gold and Silver 2015 Jun 16, 2015 - 03:29 PM GMT

By: Submissions


Nicholas Kitonyi writes: Crude oil prices have risen by nearly 25% over the last three months, while the price of gold has managed just 2.5% gain during the same period. The two commodities are largely affected by the strength of the US Dollar, and some people might have been deluded to thinking that the drop in the prices of both commodities last year was as a result of a strong dollar.

However, based on the recent rise in the price of Crude Oil, it is easy to point out that the USD may not have had a major impact in the decline of the prices of the two commodities. This also means that there could be more to the current stagnation of the price of gold than just a strong dollar.

Looking the price movement comparison between Gold, Crude Oil and the Dollar Index, it is clear that over the last two weeks, both the price of gold and dollar index have dropped illustratively by more than 2 percentage points.

Overall, the price of gold as pointed out in a previous article has remained range-bound for the most of the last few months oscillating between $1170 and $1220, thereby limiting the chances for position traders. On the other hand, the price of Oil has surged to a new multi-month high, and seems set to continue to this trend to the near future.

This suggests that the price of oil is either rallying on some unique catalysts unrelated to commodity prices, or the price of gold has remained stagnant due to some unique factors. It is most likely to be a little bit of both cases, while the USD maintains a faint impact on both prices as well.

Right now, buying long gold with the intention of selling in a couple of months may not be the right option, and this is perhaps why as an investor, speculating may be the best strategy for profiting on gold. This can be done via various platforms, but the easiest and one of the most reliable platforms would be trading the commodity via a metatrader 4 forex broker, where you can even access other instruments such as CFDs and gold stocks.

So what exactly is gagging gold price?

Commodity prices and especially the price of gold are viewed as a standard measure of global economic conditions. Normally, when the price of gold remains subdued for long, this indicates strong economic conditions as investors continue to put faith in equity markets thereby shifting money from gold investments in exchange for high yield equity investments.

However, in a situation where most commodity prices are stagnant, the situation may be suggestive of a far worse economic condition that investors perceive. Notably, low commodity prices can be used to signal declining purchasing power of economies, which lowers demand for certain key commodities/metals like Gold, Iron, Copper and Oil.

Judging by the charts above courtesy of IMF, it is clear that the overall commodity prices have been heading south over the last few years. A similar trajectory can be found just before the global financial crises of 2008/2009, apart from the price of iron ore.

This suggests that whatever we are witnessing now could be a signal that global economies are not as strong as investors perceive and thus may be about to usher in the next global financial crises. I read in a recent article that financial apps could be fueling the next financial crises as investors/traders continue to drive stock prices up day trading. 

Additionally, companies continue to develop various financial trading apps, which again make trading simpler and more accessible via various devices. For instance, the metatrader 4 recently revealed that it now has more than 5,000 trading apps in the market, which ties with the argument above.

And while the stock market, like gold seems to have taken a sideways movement over the last few months, some analysts believe that there could still be another leg up in the horizon before we finally see a plunge.

Ideally, this aligns with my analysis that it is only a matter of time before the market realizes that whatever has been fueling the stock market over the last year or so could be leading investors far from truth.

However, with the price of gold, investors can always draw some realistic market direction, and as of now, there seems to be nothing more in terms of long term upside. This is a perfect opportunity to play in the market for short term profits, trading on both the up and downward movements of prices, and in this case especially Gold.

The bottom line is that given the rise in the price of oil compared to the continued stagnation of the price of Gold over the last couple of months, and the recent decline in both the dollar index and the price of gold, it appears as though there could be more in these relationships than just the strength of the USD.

There is without a doubt the a significant play from recent news that have suggested that the supply of oil could be constrained for some time as the geopolitical tussles in middle east and Russia continues.

However, the overall commodity prices indices as demonstrated by the charts courtesy of IMF suggest that the downward trend remains the main outlook, which may be signaling a major financial crisis in the near future.

As such, trading the market for short term profits could be the ideal play, and this can be done easily via one of the best financial trading platforms like the MT4.

By Nicholas Kitonyi

Copyright © 2015 Nicholas Kitonyi - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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