Forex Trading Library

Benefits of Trading Gold as Fed prepares to hike rates

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While the markets have been going back and forth, debating on the prospects of a Fed’s rate hike in short term interest rates, the fact that there is a strong possibility for a rate hike, regardless of whether the Fed will hike rates in September or October or even in December. While the markets are likely to react strongly when the Fed does starts to hike rates, Gold, of all the commodities will most likely see a strong reaction to the news.

As traders, it is always beneficial to find, and focus on a select set of instruments that promises high volatility in uncertain times. Whether the Fed will hike rates or not, no one really knows, but regardless of the outcome, trading Gold can be greatly beneficial for traders who want to take advantage of the added volatility that comes along.

Here are a few reasons why trading Gold can be promising for traders in the near term within the context of the Fed’s rate hike plans.

Trading Gold in bearish markets on Fed rate hikes

Gold prices are one of the first to react strongly when the Fed hikes rates. This is because as interest rates start to move higher, investors tend to move their money into higher yielding assets such as bonds and the equity markets. In comparison, the yield of Gold remains unchanged. Therefore, as investments start to flow out off Gold assets, the reduced demand will play a significant role in pushing Gold prices lower. At the time of writing, the prospects of a Fed rate hike have been declining for September, but however there is still a possibility. In the unlikely event that the Fed hikes rates in September, trading Gold, whether long or short could offer traders some good profits.

Gold as a traditional hedge against inflation

So far, US inflation has been subdued and has failed to meet the Fed’s target of 2%. However, assuming that the Fed is in right in hiking interest rates, it could signal the fact that inflation could start to rise. When inflation starts rising, despite other asset groups yielding high returns, when adjusted to rising inflation the returns could actually be much smaller. Gold, on the other hand remains a classic hedge against inflation. In this aspect, even though Gold might turn bearish initially on a US rate hike, in the longer term as inflation starts to pickup, Gold trading on the long side of the market can offer not just profits but better performance against other asset groups.

Gold – A save haven asset

Besides the above two factors, Gold prices often tends to rise during times of geo-political risks and unforeseen monetary policy moves. In the current era, while there are no immediate geo-political risks there is a clear and present risk of the currency wars. With China now entering the fray with its recent Yuan devaluations, it joins many other major economies in the world including Europe (Eurozone), Japan, Australia, Switzerland in a bid to effectively devalue their respective currencies to stay competitive. Such mass devaluation in currencies can also lead to a slow but steady rise in Gold and investors tend to find Gold offering better returns and more importantly acting as a safe haven.

Gold – from ETF’s to CFD’s and Futures

There are many ways to trade Gold depending on how much an investor or a trader wants to expose their capital. At the lower end of scale, traders can make use of Gold CFD’s offered by many retail forex brokers such as and can then make use of leverage in order to capture the profits by taking both long and short positions. Besides Gold CFD’s, Gold ETF’s and futures are also other alternatives that can be used to trade besides of course, trading Gold in the bullion market directly which comes with its own risks and additional costs.

Whether you are trading futures or ETF’s or CFD’s the fact remains that now is probably the best times for Gold as the world’s largest economy decides if it is time to hike rates or not.

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