When trading commodity futures, or trading anything for that matter, you need to know the fundamentals of the particular market you are interested in. You need to know what makes it move and what would make your specific investment, in this case metal prices move higher or lower.
The first fundamental you will look at for Gold and Silver is supply and demand. When you have an excess supply with low demand you are going to see metal prices fall. In the case of this market it is the opposite, when demand rises and supply falls metal prices rally sharply.
Another fundamental for the precious metal prices would be low or negative interest rates. If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble in precious metals.
A third fundamental is the state of the overall economy. Investors buy gold thinking it will be safer in times of uncertainty in the economy. There is no guarantee that it will be safer though. Also in a time of war or invasion you will see metals prices start to flourish. In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation.
The last and maybe most important fundamental factor is the strength of the USD. If the relationship between the USD is weakening against other major currencies this could possibly be a sign of investors taking their assets out of their own money and putting it into Gold. This has been happening the last 6 years until we saw a pullback as the USD got stronger towards the end of 2008. This pullback of course sent Gold down to $300 an ounce from $1,000 an ounce to $700 an ounce in a matter of months. You can see how big of an influential factor the Dollar is to the price of gold.
Trading in futures and options involves a substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
