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17 May | A Golden Update

It’s been a bit of a rocky road for our gold play over the past few weeks since we got on board in late April at just a notch above $1,500 an ounce. The one month chart (below – courtesy of SharePrice.co.uk) shows the spot price for gold rocketed to over $1,560 an ounce in late April before returning those gains (and then some) sharpish in the first fortnight of May.

The 12 month chart (below) makes for a little more optimistic viewing in the mid- to long-term but after taking a closer look at the three more substantial short-term downtrends (June through August 2010, January 2011 and now) I decided to top up my spread trading account so as to put a more realistic stop loss in place.

So – in very rough terms – each of those three more sizeable downtrends in the past 12 months wiped the best part of 80 points off the spot price of gold. Now provided the long term price of gold continues to hold it’s upward trajectory, I need to be able to ride out a swing of that magnitude (at least early on) to stay in my trade and profit from what I expect to be longer term gains going forward.

Obviously there’s nothing to say that the next turn in trend won’t be a primary reversal rather than a short-term swing or that what’s happened in the past will happen again but that’s what I’ve punted on and that’s why I’ve allowed for a stop that will cater for more of the same magnitude of reversals that have taken place in the past 12 months. Historical data is about as a concrete as things get in this game.

For those who missed it, my original order was the purchase of gold (June 2011) at £10 a point at $1,502 per ounce. To begin with I had an overly optimistic stop in place at $1,492 per ounce. A tight stop is fine if a trade kicks off in your favour straight from the off but can have you stopped out in less time than it takes to put the kettle on if things turn against you straight away. Thankfully, in the case of this particular trade things went well to begin with and my more realistic updated stop of $1,416 an ounce has seen me weather the latest 80 point drop from a price north of $1,560 an ounce.

There is definitely a little less optimism in commodities (particularly gold and silver) now than there was even a month ago and with the US dollar beginning to strengthen against the Euro, the Pound and the Yen it could be an interesting month or two coming up.

The bottom line as it stands, well, it could be better. After tasting gains in the region of £550 early on, we’re currently down around £260 on this trade. But in the world of commodity trading, it’s another trading day tomorrow, hell, with trading around the clock, it’s another trading day tomorrow, today somewhere.

Thanks again for dropping by.