Blog by Gnanasekar Thiagarajan

Important points for investors to reflect upon before trading Gold futures and Spot Markets

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Upanishads advise mankind who is seeking happiness to look at oneself and bring about the change rather than trying to change the world and circumstances. Similarly one should understand clearly what kind of investor you are before trying your hand at gold investment/speculation. There are different market participants who use the futures and spot platform as per their needs and objectives. One need to know clearly the kind of investor/speculator you are and accordingly layout some rules and disciplines before trading. There is no point trying to become a long-term investor after the trade goes against you.

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  1.  One needs to do his/her homework on the products available in the exchanges rather than depending on the intermediary to educate them. Intermediaries also do a good job, however the right approach will be to do one’s own homework. All the exchange websites carry humungous amount of information and their staff are quite approachable to for any help. Investors desirous of trading in gold should take this basic effort at least. Once understood, select National Spot exchange if you simply believe in the long-term story of gold or Futures exchanges like MCX which has maximum volumes, if you want to dabble in futures and move with the momentum both ways by trying to profit by buying and selling both or a combination of the above.
  2. Understanding the dynamics of the gold thoroughly and completely. Instead of blindly believing in views and in greed to make a quick buck, do not jump into the bandwagon blindfolded. Be greedy to acquire more information. Unlike, in the past there is an overkill of information and views on blogs and forums that is likely to confuse you more than providing clarity. However, there are also websites that provide quality views and news that can be used effectively. The key to understanding the dynamics for gold, is to be absolutely clear that gold is not only a commodity which is subject to demand/supply, but it is also a alternative currency, portfolio diversifier and a store of value. Therefore, there are variety of factors that affect and benefit it from time to time. Therefore, it takes a while to put the puzzle together. After having been an analyst, trader and a market participant for 20 years watching gold prices, even today it is foolish to claim to have understood/mastered the dynamics, as new factors appear constantly to influence prices. Once again I am tempted to the Upanishadic wisdom here. “To just go with the flow and reject nothing”!
  3. Understanding the Risks involved. It is mandatory for all IPO’s to declare the risk factors to investors. Similarly one needs to understand the risks involved, when to stay away from gold. Also, to understand one’s risk appetite before even placing a trade. The most common mistake is to get carried away by market forces when prices are near/at its highs and bottoms due to either greed or fear. This is applicable to other asset classes like equities, where a wrong intra-day trade invariably becomes a long-term investment. This approach will just rattle the investor, specially the one who comes to test waters in gold as an asset-class. A reputed fund manager in Fidelity Investments, Boston, who manage billions of dollars says “ I like to think being wrong in OK, but staying wrong in career ending”. Adhering to stop losses and measuring one’s ability to withstand a certain loss, due to a strong view, hunch has to have a full stop somewhere. With HFT’s and algorithmic trading on the rise, it is absolutely necessary to especially traders in Gold futures to mitigate risk by using stop losses.
  4. As much as one measures the risks involved, one needs to also be prudent in taking profits from the table when it is there. This approach works well for short-term traders trading gold futures. Even though long-term investors are holding physical/futures positions with a higher target objective, even here it is prudent to offload a portion of the holdings once the returns cross a certain percentage of expectations. Since, gold is traded round the clock and prices are influenced by different factors, a potential overnight profit could turn into a loss. Contentment is the key for market participants in futures. The more contended you are the more chances of ending up the year on a profit. “Be thankful for what you have; you’ll end up having more. If you concentrate on what you don’t have, you will never, ever have enough” ? Oprah Winfrey.
  5. After all the above is duly considered and acted upon, one needs to get really lucky in getting the right intermediary to assist you to trade/invest in gold. As much as there are professional intermediaries who guide their clients, always putting the clients interest ahead of theirs, there are also many, who induce the clients to trade when one needs to stay away from the market for a personal gain. Therefore, if you are doing your homework well, you don’t need an intermediary to assist you in decision making, but an effective intermediary who can swiftly and efficiently execute trades alone for you.

Therefore, before dabbling in speculation of bullion markets, consider the above pointers carefully and may god bless you all with a good intermediary who puts the client’s interest ahead of his and happy trading!

Gnanasekar Thiagarajan

Director of Commtrendz Research


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