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09.07.2020 12:40 PM
Gold investment yields staggering profits

Hi dear colleagues! Recently, someone asked me how I protect my saving from a collapse in stock markets. Hmm, having mulled it over, I grasped the point that a modern investor has just few ways of how to diversify one's portfolio. Certainly, there are some ways which are too complicated for most amateur investors.

The first thing on my mind is to safeguard my investment through selling futures contracts on a stock index. For example, with bearish expectation for the US stocks, one can sell futures or a CFD on the #SPX futures contract with InstaForex. In this case, losses in the stock portfolio will be offset by returns from selling a futures contract. Nevertheless, without a trading background, the nerves of steel, and a precise strategy, any investor who is not a hedge fund manager is doomed to make snowballing losses.

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To protect an investment portfolio, an investor used to buy a "put" option. Nowadays, amid extreme volatility in global markets, the cost of such a "put" option has increased dramatically. The simplest strategy in case stock indexes take a nosedive is to lock in profits. The thing is that most people find it hard psychologically. What I mean to say at is that under the current market conditions, retail investors have the only way to cushion their savings. I mean buying gold or its derivatives. This could be the physical precious metal in coins or bullion, futures contracts at various ETFs and mutual investment funds, or other derivatives like XAU/USD or #GOLD on a trading platform.

You might think that retail investors are the only group who has to deal with this puzzle. In fact, anyone wants to play safe. Nowadays, global investors are thinking hard how to sort out their portfolios. They are unwilling to buy expensive stocks. If anyone ventures to buy stocks, they don't know how to hedge them. So, a great alternative is to invest in gold, the best shelter asset in the time of global turbulence.

According to estimates of the World Gold Council (WDC), Exchange Traded Funds (ETF) closed the first half of 2020 with stunning profits of $39.5 billion. Only in June, ETFs added 104 tons of gold to its reserves. The net gold inventories of ETFs swelled to a whopping 734 tons in the first half of 2020, thus logging the sharpest annual increase of 646 tons since 2009. Besides, this figure has topped 45% of the global gold production. Remarkably, a steady inflow of gold into ETFs has been going on for 7 months in a row. This is an unprecedented situation. The lion's share of the gold holdings belongs to North America and Europe where such financial instrument has gained the most popularity (picture 1).

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Picture 1: Overall inflow of gold into ETFs

The reasons behind such activity of American and European investors are turmoil in stock markets, the lack of alternative opportunities under the conditions of zero or negative interest rates as well as the overuse of the printing press which pumps market with free liquidity.

Oddly enough, the ongoing stellar rally of gold comes as a surprise to me. I assumed the scenario of a correctional decline in April – June, analyzing market behavior of various groups of traders on the grounds of the COT report released by the US Commodity Futures Trading Commission, data on open interest, and long speculative positions. At the same time, I had some doubts about the prospects of such a decline from the viewpoint of profitability of low cost investment for the wide circle of investors.

The thing is that gold is the third asset in terms of liquidity which is traded by powerful financial institutions. In this context, I have serious doubts that so-called "gold bugs" who have been amassing the yellow metal for decades will allow retail investors to buy gold at reasonable prices. So, the decline should be radical to nearly $1,500 that would enable the market to generate liquidity and spook retail investors. Apparently, gold bugs did not have enough zeal and most importantly volition to push the gold price as low as that.

On July 7, gold hit a multi-year high, having surpassed $1,800 per troy ounce. However, before that leap trading sentiment in the futures market turned radically amid a flood of money in the market. In early June, the open interest indicator was 875,000 contracts whereas the number of contracts topped 1 million in late June. Meanwhile, gold is enjoying buoyant demand. Likewise, long speculative positions of money managers increased to 206,000 in late June after 162,000 four weeks ago. Traders grasped the point that the gold price would hardly fall at all. So, they decided to buy it at current quotes. This strategy makes sense in light of remarks from Fed officials that the US central bank would provide the US economy with unlimited financial aid. In other words, the Fed is going to set the printing press at full capacity. Besides, one influential Chinese news agency added fuel to the fire. China Securities Times said that it is extremely important than ever to ensure the healthy bull market nowadays. China's market responded with a rapid rally of 7.5% and the yuan had the strongest intraday spike since early 2020.

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Picture 2: Gold price dynamic, m/m

Planning and opening long deals on gold at such elevated prices, traders should be aware about a possible fake breakout. Let me share my ideas which could shed light on the prospects for gold. Usually, I hardly consider one-month charts. Nevertheless, speaking about gold, it would be a good idea to analyze a one-month chart. The gold price closed Q2 2020 and the 1st half of 2020 above resistance of $1,775. Previously, the price jumped above this level in August and September 2011. However, that time investors purchased a much smaller volume than nowadays. In July, 2011 investors bought jointly 111 tons but they lost their interest shortly after (picture 1). Such a drop in demand pushed the price steeply down in September 2011 (picture 2). In other months prior to the previous peak, demand was rather modest. At present, we're watching steady demand for the metal during the whole half a year that creates a solid background for a long-term uptrend.

In terms of technical analysis, the fact that gold closed the 1st half of 2020 above $1,775 amid robust investments in ETFs signals that the price has surpassed this resistance. This opens the door for gold to new highs at nearly $2,000 and even $2,200. It doesn't mean that everyone should rush to invest all savings in gold and its derivatives neglecting the rules of money management. The problem is that a reasonable level to set stop loss is located at $1,650 which is 8% lower than the current price. This makes us set the upward target level 15% higher. This corresponds to the values higher than the key level of $2,000. The question is whether the gold price will be able to climb that high in the near future. Apparently, there are fundamentals for this scenario. At the same time, the mistake will cost you too much. Please, be cautious and sensible! Make sure you follow the rules of money management!

รับผลกำไรจากการเปลี่ยนแปลงอัตราสกุลเงินดิจิทัลกับ InstaForex.
ดาวน์โหลด MetaTrader 4 และเปิดการซื้อขายครั้งแรกของคุณ.
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