Question:
I am a beginning trader interested in trading gold and oil. What are the things to watch that affect the price of gold and oil?
Ramchandhar from Golden, India
Answer:
Ram, do you mind if I call you Ram? Thanks and welcome to the ranks of traders.
The first thing I tell all beginner traders is before you trade one dime, start learning everything you can learn, and do it as deeply as you can. It seems one of your first steps is gathering information. Congratulations.
The factors that affect the price of gold and oil are many, but I will reduce them all to one encapsulating word—speculation. Both commodities are bought and sold on the futures market; thus, the “future” price derives from what traders think will happen to those commodities down the line.
The speculation on future oil price centers on supply and demand. Look to the Weekly Petroleum Data report from the U.S. Energy Information Administration (EIA). Of course, this information is after the fact, so, to be ahead of this report, look to the average price of gasoline in the U.S., the rise or fall in gasoline consumption, and watch the news on China. Some say, as China goes, so does the price of oil. As well, the price of oil is tied to the health of the U.S. economy. Keep your eye on the major economic indicators. When speculators have any sense that we will soon recover, the price goes up, and visa-versa.
Keep in mind, it is all about economic growth and drivers on the road in both the U.S. and in China. When either or both countries expand economically, so do their middle classes, which means more driving. As well, when their economies are expanding, it also means more infrastructure building, which means more oil is needed to fuel the efforts.
One more thing to watch to gauge where oil might go is the U.S. dollar. Generally, as the dollar falls, oil prices rise, and as the dollar rises, oil prices drop. A weak U.S. dollar makes importing oil more expensive.
Although the price of gold is, to some degree, based on supply and demand, a more accurate predictor of the future price is the status of the U.S. economy. People buy gold as a “safe haven” in tough economic times. Witness the rise in the price of gold last fall and in March of this year.
Both commodities are considered hedges against inflation, which is another economic indicator to watch.
Trade in the day; invest in your life …
