How to Trade Gold Futures With a Broad Spectrum Perspective

Note: The current COVID pandemic has changed the face of business, markets, and the economy. Some of these changes will be permanent, others will bear outcomes that may affect businesses and households for years to come. When it comes to trading, you may find yourself needing to adapt to new circumstances. If you are interested in trading gold futures or would just like a broader perspective, this week’s blog will aim to give you more insight.


Seeing Too Little or Too Much

When driving, you know what happens when you don’t keep your eyes on the road: you risk crashing into another car or a pedestrian when the situation on the road in front of you changes. When you’re too focused on what’s immediately ahead of you, you risk getting sideswiped if the situation on your periphery changes. You don’t want to see too much or too little.

The same can be said of trading. In this article, our focus is gold. What can we do to keep an eye on what’s happening ahead while not missing the important stuff around us? The first thing you might need to do is get rid of your technical biases and assumptions.

Do Gold Prices Really Tell You Everything?

Gold prices can tell you a lot about what’s going on in the economy, but only if you keep an eye on the economy. With that said, price action makes for a fine-tuned instrument to place day trades or swing trades. But it might not give you a 360-degree comprehensive picture of the proverbial weather you’re about to encounter.

It doesn’t really matter if you’ve mastered hundreds of trading setups. If you can’t see what’s coming ‘round the corner, you might not be able to prepare for and take advantage of any “potential” scenario. So, let’s focus on those things on the “periphery” that can make a big difference–as opportunities of threats–if you look out for them.

Pay Attention to Most if Not All Federal Reserve Actions as Gold is a Monetary Metal

In the past, many traders avoided the markets during FOMC decision day, as the Federal Reserve’s decisions often caused tremendous amounts of volatility. Now, we can almost rest assured that the Fed isn’t likely to be raising rates possibly until 2023.

More importantly, however, the Fed shifted to an unprecedented 2% “averaging” strategy that aims to “overshoot” the 2% inflation target so long as the total rate averages-out over a period of time. This is pro-inflationary. This is also what often drives gold prices higher over time. Now, how might that outlook change the way you view sudden plunges in gold prices?

Pay Attention to the Money Supply and Money Velocity

But there’s more to this than the anticipation of inflation. Did you know that part of the reason for this new 2% averaging framework is that the Fed’s inflation gauge has been hinting at “deflation” for some time? The velocity of money is not increasing, meaning that the money you received (say, from the stimulus direct payments) isn’t flowing through the economy. Perhaps you stashed it away in savings instead.

However, nearly 20% of all dollars in existence were created in 2020 as part of the US government’s fiscal response to the pandemic. The money supply skyrocketed. This is not going to be of no consequence. The dollar index is sinking and there will be international ramifications for this. Hence, the rise in gold and silver demand. When you trade either metal, think about this longer-term context when planning out your trades.

Pay Attention to the Fiscal Spending and the National Debt

What does it mean that our national debt grew by $4.5 Trillion in 2020? Did you know that it took 217 years–from 1776-1992–to accumulate that same amount, and that we did it again just last year? What does it mean for commodities when the national debt’s effect on dollar “purchasing power” begins to sink?

Or, are the effects of a sinking dollar already hitting commodities (like copper–it’s been rising) before finding their way into consumer prices? The December PMI index showed an increase in “input costs” but not in “product costs” which may be soon to follow.

Pay Attention to the Jobless Claims Report

No matter what the market does (referring to primarily ES, YM, NQ, and RTY), if the unemployment rate ramps up, then it means businesses may be struggling, and Main Street may not be as vibrant as Wall Street.

What does that mean for commodities like gold? Well, it could mean that the stock market may continue to rise as long as monetary and fiscal policy supports growth in a myriad of ways. It can also mean that real economic recovery across the country isn’t keeping up with Wall Street’s optimistic performance. That’s why some analysts are saying that the stock market is “disconnected” from the economy, or that the K-shaped recovery is benefitting those who have positions in the market (the wealthy) but not the majority of Americans.

What might this mean for gold? Gold is a perceived safe haven against a crashing economy, quite possibly. Although this information won’t give you a trading signal, it might help you time a given disruption in trend and momentum.

Pay Attention to COVID Number and the Vaccine Rollouts

The Federal Reserve’s Jerome Powell has stated countless times that economic recovery relies on getting control over COVID’s spread. The reason for this is simple: more COVID cases can potentially warrant more lockdowns which will hurt the US economy.

When the economy is uncertain, investors often go to cash. But if “cash” is being printed and spent at an unprecedented rate (which it is, as we’ve explained above), then investors often turn to gold. Such trends are long-term and may not affect the day trader. However, news events concerning any of the matters above can quickly and violently move the gold market–so you’ll want to pay close attention to them even if they don’t immediately concern your trading timeframe.

Bottom Line

If you plan to trade gold successfully, you have to acquire a full-spectrum understanding of the gold market. Gold is a monetary metal, and it helps to know and monitor the monetary dynamics that can affect it. Whether you’re a day trader, swing trader, or position trader, the last thing you’ll want is to get sideswiped by an economic event that you should have seen coming. Everything we’ve touched upon above barely scratches the surface. But it’s a start. You can take it from here.




Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations.  There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.