This is a guest post from Tusk Trader, an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
Most trading shops have at least one gold bug. One trader who discusses the glories of gold so much you think the cottage he often mentions is actually a bunker he is hiding out in somewhere. A bunker he is carefully stocking with emergency supplies like canned food, bottled water, gas masks and bars of gold. I am not a gold bug but I am glad every trading floor has one. They add to the mix of opinions and a lot to the knowledge base.
The great chart Preet posted last week about gold really got me thinking about what I could, as a trader, add to the gold conversation. It has been a very long time since I have had a week go by without over hearing a conversation about gold while riding the subway, in the cardio machine corral at the gym, or in line at the grocery store. It is a popular topic for most investors and sometimes offers more questions and confusion than solutions.
Gold has two unique qualities that make it fun, exciting and sometimes frustrating to trade.
The first is, unlike other metals or commodities, gold as a product is a surprisingly useless (but not worthless) item that is plucked from the ground. The only real demand outside of the financial markets is the Indian wedding season. There are more uses for feathers than for gold to the average person. Oil and gas heat our homes and makes our cars move. Gold sits there, looking all sparkly and fancy, but does nothing. As there is no functional need being met, the fluctuating price of gold comes from the extent to which people purely desire to own it.
The second fact that makes gold unique to trade is also what adds to gold’s large price volatility. The two big market forces, fear and greed, can both push gold higher at the same time. Fear pushes many other investment vehicles down, which results in a more balanced market the higher the price goes. The opposite can happen with gold. Overall market fear often pushes the price of gold higher. This creates very fast market up swings and even faster drops in price when the buyers disappear. I hear people around town say they are buying gold out of fear, but as a trader, I am fearful of buying something that hasrisen over 25% in about 60 days (like it did from July to September this year). Gold also doesn’t always rise when the market falls or fall when the market rises. Investors are not getting the protection or the hedge they always think they are.
In volatile times, gold will offer you lots of excitement but not always the security you might be seeking.
Thanks Tusk. Make sure to follow Tusk Trader on twitter: @tusktrader