Gold and Inflation
My crystal ball has broken so I am afraid I cannot tell you what will happen in the future regarding prices of Gold and Silver or any commodity so make up your own mind what you do with your hard earned money.
This is more of an investing strategy then a trading strategy. You can read lots of articles about Precious metals from lots of experts. There are lots of ideas on Gold and Silver. Most say that Gold and Silver are not a very good hedge against inflation or that Gold and Silver are not well correlated to inflation. In fact Gold tends to go up and down when there are economic problems. Gold is seen as a safer investment then paper money. That might be true short to medium term, but long term Gold and Silver do increase steadily in line with inflation. 1oz of Gold will buy you around 400 loaves of bread. This has roughly been the same since biblical times. It is might not be a perfect analogy, but the point is long term The gold price has stayed within an inflationary range.
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Buy gold on a regular basis
As paper (or plastic) money devalues quite rapidly, keeping it in the bank is not so great of an idea. But going out and buying Gold will probably just keep up with inflation over a long period if we are lucky.
So how can we buy gold and make money? What if we bought a small amount of gold each week. Over time we should expect our investment to increase in value. Long term the value of our gold should keep up with inflation.
Use Leverage to buy Gold
Keeping up with inflation will not make us any money. One way would be to buy gold through a broker at a leveraged price. If we could buy gold at say 1:400 leverage, we could trade gold with a lot less money in the bank. The downside to trading with leverage is of course we could lose a lot more money if the price dropped. So we have to do our homework on just how much gold we could buy and what sort of drop in the price of Gold we could survive.
If we were to expect up to a 40% drop in the gold price we need to calculate for each trade the equity needed. If you are trading 1 lot of Gold you might need more than $100,000 in equity per trade. Some brokers will let you trade smaller lots. With a 0.01 lot you might only need $1000 per trade to cover a drop in the gold price. There are also accounts where you can trade smaller lot sizes such as 0.001.
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Dont take too much risk
Most people are not going to like this but here is an idea that makes sense on paper. What if we only covered our trades for a small percentage drop in the gold price, even though we know a 40% drop was quite possible. The reason why we might want to do this is so we can trade with less equity and in the case of a 40% drop in the gold price we have not lost 40%, we have only lost a smaller percentage. We could set a stop-loss on our trades at this smaller percentage. The point is we can afford to lose a smaller amount if the price drops because we are going to start buying again after the price drop.
To further make our buying of gold more profitable we are only going to buy gold after it has dropped in price of is on the way down. So if the price of Gold is going up, we do not buy. If the price is dropping, we buy.
Buying when the gold price is at its lowest gives us a great advantage. It can make our gold buying far more profitable than buying at a fixed point in time such as every week. We are trying to buy at a lower price over a long period to average a lower price.
If our trading frequently is once a week, we will not want to be buying every week as we do not buy in a bull market or when the price is rising. So we might on average only buy gold once every 2 weeks.
As we are buying every week or two we only want to open a relatively small trade each time. The lot size is calculated on our equity and the drop in gold price we are expecting or prepared to except.
Use an indicator as to when to buy
As gold tends to trend we can use the Relative Strength Indicator to assess the market. I look at the Relative Strength of a weekly, 4 hourly and hourly gold chart. Adding the results of these indicators we can use the results as an indication of when to buy. I actually use an automated gold trading program to assist in the buying of gold and silver, but it is really not necessary as this is such a simple system.
So the basic idea of the system is to use leverage to our advantage and buy when the price is falling or at its lowest and add money to cover each trade you make. As the price moves up you no longer need to add any of your own money. Over time you can increase the lot sizes of the gold you are buying. As the price of gold rises it allows for the increase in lot sizes. This increase in lot size has a compounding effect. As long as the price continues to rise , profits will increase exponentially.
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Long term investment strategy
This is obviously an extremely long term investment. It is very risky if you do not understand leverage and the volatility of the gold markets.
I have not mentioned an exit strategy for the trades. You could of course exit trades at any time. As you pay the broker a commission to enter a trade it is not a good practice to enter and exit gold trades too much. Ideally the system is very long term and the trades could stay open for a very long time. If the opportunity arises to make a large profit as gold prices have peaked it would make sense to close trades and reopen as the price falls.
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