How to Profit from Gold's Current Price Instability

By John Whitefoot

Gold prices hit one-week highs after the Federal Reserve did exactly what it said it would do (not what the market feared it would do)—continue it’s $85.0-billion-per-month bond buying program until unemployment numbers decrease and inflation increases.

Gold, often seen as a safe haven investment and hedge against inflation, had lost more than 20% of its value since the beginning of the year after the Federal Reserve hinted it would start to taper quantitative easing, which would put an end to its loose monetary policy.

More recently, gold prices had been on the decline since the beginning of September on encouraging U.S. economic data and suggestions that a war in Syria would be averted. Between September 3 and 17, gold lost approximately six percent of its value.

But in spite of gold’s year-long tumble, it’s important to remember that gold prices are still roughly 60% higher than they were in late 2008, before the Federal Reserve kick-started its first round of quantitative easing.

Gold was poised to fall even further had the Federal Reserve announced it would begin to taper its quantitative easing policies. It didn’t, however, and the markets responded in kind.

The price of gold bullion soared 4.2% last Wednesday to around $1,367 per ounce, its largest daily gain since June 2012, after Federal Reserve chairman Ben Bernanke said it would stick to its stimulus plan (for now).

The correction in gold prices was inevitable. That’s because gold, and many other sectors, have become overly reliant on the Federal Reserve’s support. Gold prices drop when investors think the Fed’s going to taper, and they rise when it doesn’t. Even the risk of war in the Middle East takes a back seat to the Federal Reserve’s quantitative easing program.

While the correction in gold prices was inevitable, so too is the fact that the Federal Reserve will eventually begin to scale back quantitative easing, though probably not until early 2014. When it does, gold prices will likely resume their decline. After all, encouraging economic data will point to sustained U.S. growth—and less of a need for a low-interest-rate environment.

All of this will negatively impact gold bulls. That said, investors can gain exposure to gold regardless of the fluctuations. Long-term investors looking to benefit from rising gold prices might want to consider a gold exchange-traded fund, (ETF) like SPDR Gold Shares GLD or iShares Gold Trust IAU, individual mining shares, or even physical gold.

More active investors will focus on futures and options. That said, with quantitative easing on the backburner and few major political triggers out there to spark fear into the markets, short-term investors looking to make money on gold are probably going to want to take a breather.

Or investors could look at ETFs that short gold, like the ProShares UltraShort Gold GLL or PowerShares DB Gold Short ETN DGZ. They could also consider an ETF that shorts gold mining companies, like Direxion Daily Gold Miners Bear 3X Shares DUST.

While it’s impossible to predict where gold prices will go, there is enough economic and geopolitical sentiment to make a case for going either short or long with gold. Thankfully, there are a large number of investing strategies to suit any outlook.

This article How to Profit from Gold’s Current Price Instability was originally published at Daily Gains Letter