How to Trade Gold Ahead of the 'Fiscal Cliff'

If you have watched the gold market over the last few weeks, one thing is clear — gold, more than any other commodity, has been tied the question of whether we will see a resolution to avert the "fiscal cliff."

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Lawmakers have just weeks to solve the "fiscal cliff," which refers to a series of legislation, which, if left unchanged, will result in automatic tax increases and budget cuts come Jan. 1.

There have been many bearish factors pressuring gold over the last few weeks: A stronger U.S. dollar, profit taking on the 9 percent gain gold has made over the year, and heavy betting in the options markets that the yellow metal is about to fall. All of this, and yet we are, still at over $1,700 per ounce. As we have moved closer to the end of the year, and a resolution of the cliff remains remote, gold seems to be that safe haven that investors are seeking. In fact, last week, when the arguments from both Democrats and Republicans became more contentious, gold rallied back from a large sell-off the day before.

But traders, beware! When all the focus and pressure are one-sided, bubbles are created, and bubbles eventually burst. If you want to trade gold and be long, the entry point that has worked time and time again is between $1,675 and $1,685. Keep those stops around $1,669, because if a deal is made and both sides as well as the public are satisfied, then the gold bubble can burst.

On the other hand, if you want to trade from the short side, selling gold between $1,725 and $1,735 has worked. Put your stop up above $1,750. Remember, as we move closer to the year-end, expect volatility to increase.

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