Unlock the secrets of trading gold

So everyone’s talking about trading gold.

What is it all about?

Human beings have long valued and treasured gold for its inherent luster and malleability. In fact, gold has been used in human commerce since the societies of the ancient Middle East over 2,500 years ago.

Gold Trading Basics

While gold has generally held its value for centuries, traders’ interest has waxed and waned in recent years. From the early 1980s until the early 2000s, there was little interest in trading safehaven gold amidst the strong, stable economic growth and high-flying stock markets. As a result, gold generally consolidated between $300/oz and $500/oz for twenty years, from 1982-2002.

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Interest in gold grew slowly through the 2000s before exploding with the onset of the Great Financial Crisis in 2008. Gold prices rose in sympathy, hitting an all-time high above $1900 in late 2011. In this guide, we will discuss the major forces that drive gold prices, along with some ideas for trading strategies and some of the most common methods for trading gold.

Factors that influence gold’s price

Gold is one of the most difficult financial assets to value. Gold is similar to a currency like the U.S. dollar or the euro because it is durable, portable, uniform across the world, and widely accepted; however, unlike these more commonly traded currencies, gold is not supported by an underlying economy of workers; companies, and infrastructure. In other ways, gold is more similar to a commodity like oil or corn because it comes from the ground and has standardized physical characteristics. Unlike other commodities, though, the price of gold often fluctuates independently of its industrial supply and demand.

Unlock the secrets of trading gold

Because of this dynamic, the emotions and behaviors of traders tend to drive major trends in the yellow metal. With gold more than any other asset, traders seem to be polarized between diehard “gold bugs” who believe that gold should be worth $10,000 an ounce because central banks around the world are debasing their currencies and bearish traders who assert
that gold is a “barbarous relic” of the past that should be worth closer to $100. Unlock the secrets of trading gold signals.

Gold Signals

Unlock the secrets of trading gold One of the biggest points of contention for gold traders is on the true correlation between gold and the U.S. Dollar. Because gold is priced in U.S. Dollars, it would be logical to assume that the two assets are inversely correlated, meaning that the value of gold and the dollar move opposite to one another. In layman’s terms, it takes fewer dollars to buy an ounce gold when the value of the dollar rises, and it takes more greenbacks to buy an ounce of gold when the value of those dollars is lower.  gold trading basics

Trading Gold

Unfortunately, this overly simplistic view of the correlation does not hold in all cases. The chart below shows the rolling 100-day correlation coefficient between gold and the U.S. Dollar. The correlation coefficient measures how closely together gold and U.S. dollar have moved over the last 100 days; a reading of 1.0 would show that they moved in perfect lockstep with one another, while a reading of -1.0 would show that their movements have been diametrically opposed.

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As you can see, the correlation is negative the majority of the time, showing that the U.S. Dollar does tend to move opposite to gold. However, it has also shown a tendency to spike rapidly in periods of financial stress, such as in the depths of the Great Financial Crisis in early 2009 and the end of the first iteration of Quantitative Easing in mid-2010. This is because traders will buy both gold and the U.S. dollar as “safe-haven” assets in periods of uncertainty.

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Traders who blithely traded on the assumption that gold and the dollar are inversely correlated would have encountered a couple periods of tough market conditions and likely losing trades over the past few years.

Gold trading strategies

As with any trading instrument, there is no single “best” way to trade gold.

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Therefore, longer-term traders may want to consider buy opportunities if real yields are below 1%, a level which has historically been supportive of gold prices.

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Conversely, if real yields rise above 2%, investors may want to focus more on sell trades. Of course, this relationship between real yields and gold prices plays out over longer-term timeframes, so shorter-term gold traders can generally ignore the level of rates.

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Because these futures contracts are actively traded in a central location every single day, they provide the most accurate, up-to-date prices for golds spot trading is based directly on the actual price of gold, not an exchange-traded product like some other products. Gold offers diversification from other commonly traded markets.

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The inverse correlation with the U.S. dollar was covered at length above, and gold has historically moved independently of stock and bond market prices as well. However, please be aware that there is no guarantee that it will be correlated in the future and past performance is not indicative of future results.

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