The risks of trading in and out of precious metals futures were painfully evident on August 11 as the active gold contract plummeted nearly $118-an-ounce to $1,921.80 an ounce, gold’s largest one day decline in seven years. The loss of 5.8 percent came just three trading days after gold hit an all-time record high of $2,069.40. Silver suffered its biggest loss in nine years, falling 15 percent or $4.40 an ounce to $24.86.
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An upward bounce in the U.S. dollar along with a slight increase in yields on U.S. Treasury bonds—reversing recent trends—helped trigger the selloff.
It was an abrupt turnaround for the precious metals whose powerful runup since mid-March had made it appear they had nowhere to go but up. But the fact is futures markets can be notoriously volatile. Many traders are speculators who attempt to profit from short-term price movements, and, in so doing, often exacerbate those swings.
Long-term investors, on the other hand, have benefitted from an historic rise in gold and silver prices, particularly since mid-March. Even at the close of trading on August 11, following the huge selloff, gold was still up 32 percent from its March low, while silver had leaped 121 percent.
At a time of extreme volatility, it’s important to remember that gold, in particular, is a universally recognized store of value and has been for centuries. Given that fact, and gold’s long-term performance, it is far safer to buy and hold the precious metal for the long term rather than trade in and out of futures contracts.
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