Commodities: Volumes mean that gold still glisters for some

Investors seeking safety have traditionally turned to gold. It enjoyed a bull run until September 2011, driven by concerns about inflation and the global economic crisis. But as the euro crisis has eased, the price of gold, which peaked at $1,989 per troy ounce last year, has stabilised at about $1,600.

While a fall in the price of gold negatively affects those who invested directly in the physical metal, spread betters can use a variety of financial products to try and make money from a volatile gold price.

As such, it remains one of the most popular metals markets for traders at some large spread betting firms.

Joshua Raymond, chief market strategist at City Index, says: "One of the key aspects that investors like about gold is that prices can be technically very transparent and this makes trading opportunities for technical analysts fairly easy to spot."

There are various ways in which investors can gain exposure to the metal: gold funds; exchange traded funds; physical gold; spread betting; contracts for difference; mining shares; futures; and options - with the key being whether or not the investor wishes to inject leverage.

Typically, long-term investors choose gold funds, mining shares, exchange traded funds and physical gold, with active traders focusing on futures, options, spread betting and contracts for difference, because of their shorter trading horizons and their desire to use leverage to amplify the movement for their trading positions as they seek rapid gains.

One thing traders particularly like about gold is that it can be traded at almost any time of day, as it is a 24-hour market. Many spread betting firms calculate gold trades at 0.1 basis points per US dollar, which means that for every dollar movement you would either make or lose 10 times your stake. So if you buy £5 worth of points and gold moves up $2, you would make £100 (5 x 2 x 10).

"Another reason traders like gold is that the price can move enough to create good short-term trading opportunities," says Mr Raymond. "Since the low of $1,527 was reached in mid May, the price of gold has rallied 7 per cent, or $110.

"This is the equivalent of 1,100 points, which if you performed a buy spread bet position with a stake size of just £1 per point, would have netted you a tax-free gain of £1,100."

Of course, he adds, along with volatility, there is the potential to encounter large losses if you do not consider risk management tools such as guaranteed stop losses, which automatically close positions at specific levels chosen by you if the market moves against you.

So which way do experts think the price of gold is going to go? Ric Spooner, chief market analyst at CMC Markets, says the medium-term investment case for gold remains good. "Negligible interest rates that force investors to seek capital appreciation; ongoing central bank gold buying, and concerns that international monetary policy settings carry a major tail inflation risk [the possibility an investment may move more than three standard deviations from its current price], are all likely to support the gold price," he says.

"In technical terms, gold's range trading behaviour over the past 11 months looks most like a correction of the larger uptrend rather than the end of the game. An eventual move above $2,000 looks the most likely scenario."

This view is shared by Clive Burstow, investment manager at the Baring Global Mining fund. He says: "Upside potential is likely to be driven by a combination of ongoing supply disappointments from producers, coupled with rising demand and further easing in monetary policy or quantitative easing from various central bankers. So the ingredients for a strong rally and a return towards the highs in the price of gold are still firmly in place."

But others disagree. Simon Denham, head of Capital Spreads, says: "The yellow metal has as many antagonists as proponents these days and, in truth, I believe that there is as much chance of the market being at $1,000 as there is of it going up to $2,000."

Experts say traders must always keep an eye out for such factors and place their stop losses or reversals at points that would indicate a break. They add that the volatile conditions mean traders need to consider having wider stop losses to give the market time to prove them right.

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