The business of buying and selling gold and silver, more commonly known as being a bullion trader, or gold trader, is one of the oldest businesses around. Probably the second oldest business! Making gold and silver trading profitable depends on the timing of the trades. Buying gold or silver when prices are screaming higher and everyone seems to want gold coins or silver coins, will assure only loses. There are several key strategies to getting in the gold trading business and making the fattest margins.
Timing in Buying Gold or Selling Gold is Everything
Where every real estate investor chants "location, location, location" as the mantra for successful real estate investing, the key for gold and silver investing or trading is "timing, timing, timing."
Within the span of 17 days, from October 12th through October 30, 2009, the price of gold fell roughly $30 and the price of silver dropped over $1.40. Based on historical gold and silver price moves, the downtrend will probably continue until gold taps the $1000 price and silver hits the $15 price level. This dramatic and short lived plunged shows how quickly the gold and silver markets can change direction. Within days or even hours, profits can either be made or lost.
Fortunately, such fast gold price plunges can be spotted early on if a bullion trader or gold trader understands the seasonal patterns, commodity trading patterns, and gold and silver ratio.
- Seasonal patterns show that both gold and silver tend to rise starting in September and generally continue rising through January or February. This is partly due to the Indian buying season. There are other factors such as buying habits of jewelry fabricators, and commodity traders getting more active when they return from holiday breaks.
- Commodity trading patterns can be a great help for deciding when the top for the gold or silver price - or any other commodity market for that matter - is close. These same reports indicate bottoms in the silver and gold market even more precisely. Not an exact science, reading the trading reports published by COMEX is more an art based on understanding the players in each market and how concentrated long and short positions are. Commodity trading services will deliver analysis that includes interpreting the COMEX Commitment of Traders report which shows the trading activity level for the large and small speculators, commercial hedgers, and the small investors.
- Throughout recorded history, gold and silver has traditionally traded at a ratio of 12:1 up to 16:1. Meaning, 12 ounces of silver equaled the value of 1 ounce of gold, or 16 ounces of silver could be traded for 1 ounce of gold. In dollar terms, 12 or 16 x $silver price = $gold price. Today, gold trades for over 63 times the price of silver! There could be a fortune made with understanding this ratio. What the gold to silver ratio is revealing, is that either silver is very undervalued, or gold is very overvalued. Silver has one major strike against it currently that might be keeping this ratio in golds favor. The strike against silver is that the 16:1 ratio was in effect when silver was used as money. Now, nowhere in the world, does silver regularly circulate as money.
Example of How to Profitably Trade Gold and Silver
During the September and October price run up in both gold and silver, an investor - call him Lazy Buck - has a position with both gold and silver and decides to consider selling and locking in profits.
He first checks the seasonal pattern. Since it is late October, it means there are still at least 3 months for both gold and silver in their strong part of the year.
Price wise, silver has not surpassed its' high of $50 per ounce in 1980 nor even the $21 high reached in March 2008, while gold has blown through all of its' previous high points. L.B. decides this is a bad sign for silver, even the precious metals market in general.
The Commitment of Traders report shows the big players - all 4 of them - are working together to push the prices lower by going very short both gold and silver. Strike two against both gold and silver.
With two of the three key indicators telling L.B. to sell some of his position, he decides for locking in profits on silver and sells 200 ounces in the form of 100 ounce generic bars. With the spot price at $17.62, Lazy gets a bid for $17.12 and takes it. Within days of Lazy locking in the sell price and his 3 fold profit - since he bought silver at $4.25 per ounce, the silver and gold prices begin to drop significantly.
Chalk one up for Lazy Buck and the three key strategies for spotting tops and bottoms in gold and silver prices!
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