How to Trade Gold – A Beginners Guide To XAUUSD

how to trade gold

Once upon a time, trading gold was difficult. You had to buy and sell the actual metal itself. Then came futures and options, allowing traders to take positions without actually ending up owning a safe full of bars, coins, or jewelry. Gold exchange-traded funds (ETFs) and CFDs made it a lot easier, almost like trading actual stocks.

Today, trading gold is almost no different from trading foreign exchange.

If a retail investor uses a financial-betting platform it is simply a matter of buying or selling depending on whether you think that the gold price is likely to rise or fall.

Overview

For generations, humans have treasured and valued gold because of its beautiful appearance and its malleability. Since early Middle Eastern society 2,500 ago, gold has been a feature of human commerce, and this means that it is the most ancient form of currency that is still used and recognized today.

Gold has a reputation for retaining its value throughout natural disasters, wars, and even the fall of empires, and hence it is known as a “safe haven” asset. Despite the fact that it retains its value well, however, gold has waxed and waned in the interests of traders over recent years. Between 1980 and 2000 there was surprisingly little interest in gold trading due to the high-flying nature of the stock market of the era coupled with strong economic growth. For around 20 years, the price of gold remained between $300 and $500 per ounce.

However throughout the 2000s, the interest in trading gold began to grow again, and after the Great Financial Crisis hit in 2008, the price of gold exploded to an all-time high of more than $1,900 per ounce in 2011.

For some people, trading gold is attractive simply because the underlying asset is physical rather than a number in a bank account. There are a variety of strategies for trading gold ranging from studying the fundamental factors affecting supply and demand, studying the current positioning of gold traders, to technical analysis and studying the gold price chart.

Gold has traditionally been seen as a safe haven, precisely because it is not subject to the whims of governments and central banks as currencies are. Gold prices are not influenced directly by either fiscal policy or monetary policy and will always be worth something. Unlike a currency like the EUR,  that can end up being almost worthless because, for example, of rampant inflation.

Even for those who rely principally on the fundamentals, many experienced traders would agree that a better gold trading strategy is incorporating some components of fundamental, sentiment, and technical analysis. A gold trading tip we offer is that fundamental and sentiment analysis can help you spot trends, but a study of the gold price chart and patterns can help you enter and exit specific trades.

Trading Gold VS Trading Forex

The popularity of trading gold on the Forex market has increased dramatically over the last few years as an alternative to trading traditional currency pairs. There are several reasons for this, with many investors looking to this precious metal as a buffer against inflation, and because it stores value, leading to it being known as a “safe haven” instrument.

Although traditionally the price of gold has tended to move inversely to the US Dollar, over the last few years this correlation has no longer necessarily be the case due to an increase in geopolitical uncertainty.

While many forex brokers now offer the option of trading gold relative to several currencies including the Swiss Franc, the Australian Dollar, and the Euro, it is still most commonly traded relative to the US Dollar, being represented by XAUUSD.

Although trading gold may not seem to be very different from trading any other currency pair, this is not truly the case. There are strategies that must be borne in mind when trading gold, as a quick glance at any XAUUSD trading chart will reveal that there is a lot less volatility in fluctuations.

Gold moves more or less directly and has fewer large movements within timeframes than other traditional currencies. To be able to trade Gold against the dollar effectively, it is vital for an investor to be aware of the many factors that impact this pairing, and to gain a greater understanding in order to inform their strategy.

Gold as a safe haven

Gold has traditionally been seen as a safe haven, precisely because it is not subject to the whims of governments and central banks as currencies are. Gold prices are not influenced directly by either fiscal policy or monetary policy and will always be worth something. Unlike a currency like the Euro,  that can end up being almost worthless because, for example, of rampant inflation.

Gold can also be used by traders, along with assets like the Japanese Yen, the Swiss Franc, and the notes and bonds issued by the US Treasury, as means to secure their investment.

That means that when traders are worried about risk trends they will tend to buy haven assets. On the flip side, traders tend to generally sell haven assets when risk appetite grows, opting instead for stocks and other currencies with a higher interest rate. This makes gold an important hedge against inflation and a valuable asset.

Note, though, that while it is possible to trade the Swiss Franc or the Japanese Yen against a variety of other currencies, gold is almost always traded against the US Dollar.

Therefore, trading gold means you will need to take into account the movements of the US Dollar. For example, if the value of the US Dollar is increasing, that could drive the price of gold lower. Keep up to date with the US Dollar and key levels for gold on our gold market data page.

An additional factor to take into account when learning how to trade gold includes market liquidity. The World Gold Council estimates that average daily trading volumes in gold are higher than in any currency pairs other than EURUSD, USDJPY, and GBPUSD.

That makes it higher, for example than the daily trading volume in EURJPY, so spreads – the differences between buying and selling prices – are narrow making gold relatively inexpensive to trade.

Trading hours and Liquidity

Gold trading hours are nearly 24 hours per day.

Gold exchanges are open almost all the time, with business moving seamlessly from London and Zurich to New York to Sydney and then to Hong Kong, Shanghai, and Tokyo before Europe takes up the baton again.

This means liquidity is high around the clock although, as with foreign exchange, it can be relatively quiet after the New York close, with lower volumes and therefore the possibility of volatile price movements.

When is the Best Time to Trade Gold?

The price of gold tends to move more at certain times of the day. Day traders should try to day trade Gold during these more volatile times to take advantage of the increased price movement.

The data show that the price of gold tends to move the most on average between Noon and 8 pm London time, roughly corresponding to the hours when markets are open in eastern and central U.S.A.

This suggests that the best time of day to trade Gold, whether as Gold options, Gold futures, spot Gold, or XAUUSD is from Noon to 8 pm London time. This is probably true because the major Gold market opening times are within this period.

How to Trade Gold – Things to Know

Trading gold as a forex transaction is a great way for investors to diversify their portfolio while benefiting from gold’s inherent characteristics, with no need to actually purchase the physical asset.

Gold is a flexible and easy instrument for Forex trading as it can be done anywhere and at any time, with none of the costs or problems associated with the storing of actual physical gold.

It is important to remember that the value of gold is strongly linked to the market’s economic situation, and should there be a recession or financial crisis, investment in gold will soar in popularity, thus causing gold to rise in price during periods of economic distress. Trading in gold requires a large deposit, as it is generally a long-term investment with a fairly large spread. This reduces general access to trading this instrument.

Gold against the Dollar

In the international world of finance, the US Dollar has a function all of its own. It is the currency that is accepted most often for worldwide reserves and is also the currency of choice for the settling of monetary transactions between different countries.

The US Dollar is the currency in which most of the world’s central banks hold the majority of their foreign currency reserves, and it is known as such a strong currency that there are a number of smaller countries that have elected to opt for the US Dollar as their own currency instead of holding their own. There are also several other small countries that peg their own currencies to the value of the Dollar.

While XAU can be traded against other currencies, it is the US Dollar that is traditionally used to set the price of gold, as well as the price of a number of other popular commodities, and the OPEC countries use the Dollar whenever they conduct oil transactions around the globe.

Due to these many factors, it is easy to see why the US Dollar has become the world’s most frequently traded and most important currency. With more currencies being traded against the Dollar than against any other global currency, it is essential for any trader who wants to invest in the Forex market to gain a good understanding of the US economy, and the factors that influence it, before getting involved with trading.

Factors that affect the XAUUSD pair

The value of gold will always be affected by the health of worldwide economies as measured by employment data, interest rates, inflation, and GDP growth.

Monetary policies of the major central banks also have a role to play in influencing the value of gold on the Forex market, and the dynamics of supply and demand are also key to take into account when investing in this instrument. Gold is a tricky asset to value. Similar to the Euro or the US Dollar, it is accepted worldwide, portable, and durable; however, unlike traditional currency, it has no underlying supporting economy of infrastructure, companies, and employees.

This makes gold more like a commodity such as corn or oil, but what makes it different from other commodities is that the value of gold will frequently fluctuate independent of the dynamics of supply and demand, with trader behavior and emotions driving some of the major trends in this precious metal.

Traditionally, one of the best ways of determining the price of gold has been to look at the level of real interest rates: i.e., the interest rate minus inflation.

If the real interest rate is low, investment methods such as bonds or cash will provide very low returns, which encourages traders to find other ways to protect their wealth. If, conversely, real interest rates are up, it is possible to make a good return on bonds and cash, and as a result, the appeal of gold will diminish.

10 Gold Trading Tips for Beginners

As forex traders seek out stable investments that can hedge against inflation, market instability, and other geopolitical factors affecting currency prices, gold has grown in popularity over the past few years. Traders can use gold as a way to hedge against other investments, or as a safe haven that provides consistency over time and is more resistant to dramatic swings in valuation than many other currencies are.

XAUUSD is one of a number of gold pairings forex brokers now offer, making it easier than ever to incorporate gold as part of your forex trading strategy. The stability of gold prices over time also makes it an important asset during inflationary periods such as the one we’re seeing today.

As the COVID-19 pandemic shakes the global economy, foreign governments and savvy forex traders are moving more of their money into gold as a safeguard against losses resulting from inflation. Economic practices such as printing more money can weaken global currencies, depreciating their value in relation to stable assets such as gold.

Gold’s stability is owed largely to its relatively fixed global volume, which can’t be dramatically increased in the same way that governments can print more paper currency. If you’re eager to make better use of gold and capitalize on potential profit opportunities, here are nine trading tips to keep in mind.

1. Market Sentiment and USD movement

Returning to fundamental analysis, a beginner needs to consider one point, in particular, the market sentiment and if it tends to be positive or negative. If it is negative, then the gold price is likely to fall, and if positive it is most likely to rise. This is therefore the simplest strategy to use when trading gold.

For the more advanced trader, though, it is important to consider too what is likely to happen to the US Dollar. In recent years, the Dollar has become increasingly regarded as a safe haven as well, which explains in part why the gold price in Dollars has remained relatively stable.

Thus if you think, for example, that the geopolitical situation is going to worsen, you might consider buying gold but at the same time selling, say, the Australian Dollar against its US counterpart.

2. Track Industrial, Commercial Demand for Gold

An advanced trader will also want to keep an eye on the demand for physical gold and gold jewelry.

Increased market demand for gold can affect prices due to the fixed global supply of the material. Demand can come in multiple forms. Certain industries may increase their acquisitions of gold due to the material’s role in consumer projects. Both the medical and tech industries, for example, use gold in certain products and solutions.

Consumer demand for gold jewelry can also affect prices. Consider global demand in foreign markets where gold jewelry is considered both a luxury good and an investment asset.

In India and China, in particular, gold jewelry is still seen as an important long-term investment, it has its uses in the industry too and central banks’ buying and selling of gold can also be important – all factors that can move the price.

As for supply, advanced traders will want to keep an eye on the output figures from the main producing companies such as Barrick Gold and Newmont Mining.

That said, all the rules of trading forex also apply to trading gold. Retail traders need to be careful not to over-leverage and to think about their risk management, setting targets, and stops in case something goes wrong.

3. Daytrade with the New York Close in Mind

Gold is a nearly 24-hour market, but peak liquidity is typically found during New York trading hours. Whether you should target trades during or after New York trading hours depends on your goals.

Whereas trades during peak activity offer high liquidity and low volatility, making them good targets for safe-haven positions, off-hours trading can provide the extra volatility needed to execute scalping strategies.

At the same time, this extra volatility increases the relative risk of any trade.

4. Simplify Analysis by Targeting Previous Highs and Lows

Because XAUUSD tends to trade in a range, one of the easiest strategies is to identify buy or sell opportunities within previous highs and lows for the trading pair. Traders can open a position on gold when it’s trending up, for example, and target a previous high as their sell price, or vice versa.

Because gold is a relatively stable asset, it’s likely to reach these previous highs or lows over time. Note that this isn’t a good strategy for day trading, because it can take time for these targets to be hit, and range-bound strategies typically don’t offer quick profit opportunities as momentum strategies do.

Still, it’s a relatively low-risk strategy designed to generate some profit off reliable XAU/USD price movement.

5. Consider Geopolitical Implications on Currencies

When political or economic uncertainty creates concerns about currency prices, gold can be a stable safe haven that protects your liquid assets.

Gold tends to be strongly correlated to the US dollar, as well as other stable currencies such as Japan’s yen, and opening a position with XAUUSD can be a reliable means of protecting your assets from unpredictable situations affecting other forex markets.

6. Use the Symmetrical Triangle for Analysis

The symmetrical triangle is a simple chart pattern that indicates a period of consolidation that may lead to a price breakout. Symmetrical triangles feature the convergence of two trend lines progressing at a similar slope, but in opposite directions.

As consolidation takes place, price movement on the pairing grows tighter, creating a potential trading opportunity on a breakout.

Most traders use the symmetrical triangle pattern along with other technical indicators, such as liquidity or the relative strength index. When other indicators suggest a potential price breakout, the symmetrical triangle can add further confirmation and increase confidence in placing an order on XAUUSD.

A stop-loss order can be placed just below the descending trend line after the two trend lines converge, and sell orders can be issued in the event that the price of XAUUSD successfully breaks out.

7. Monitor Central Bank Buying

Central banks tend to buy gold as a hedge when they’re anticipating volatility in certain currencies.

Recently, for example, China and Russia made headlines for making significant investments in gold, which reflected their concern about the future price of the U.S. dollar and the euro, among other major global currencies.

When central banks start buying gold in large amounts, it tells forex traders two things.

First of all, governments are operating out of a belief that major currency values may dip, which could encourage traders to move a greater percentage of their investments into less volatile funds.

Second, increased central bank buying typically causes an increase in the price of gold, at least in the short term. If gold prices start trending up, it could be an opportunity to turn a quick profit.

8. Track Real Interest Rates

Gold has a well-documented correlation with real interest rates, with prices rising as interest rates decline and prices dropping as interest rates rise.

The real interest rate is determined by subtracting the inflation rate from the nominal interest rate, resulting in a percentage gain or loss that takes inflation into account.

Historically, gold prices tend to rise when the real interest rate dips below 1%. By watching this interest rate as it changes over time, you can identify a strong buying opportunity, especially if you’re looking for long-term trading opportunities.

By contrast, a real interest rate above 2% likely deflates the value of gold. Many experts will recommend a sell on XAUUSD if the real interest rate reaches this threshold.

9. Target Moving Average Crossovers

As gold prices tend to fluctuate within a range, they will cause different moving averages to cross over on forex charts. Many traders will buy whenever a shorter-term moving average crosses a longer-term moving average.

For example, if a 20-day moving average were to cross the price point for the 50-day moving average, it would signal a buying opportunity for long-term traders.

In the XAU chart below, for example, the 50-day moving average moves above the 100-day moving average in early April 2020—when the pandemic was starting to inflict significant damage on economies around the globe. Not surprisingly, this moving average crossover predicted a significant rise in the value of gold over the next few months.

The opposite is also true. If a short-term moving average were to dip below a longer-term moving average, traders using this strategy would likely sell in anticipation of continued losses.

There’s no exact science to which moving averages you should use to make these determinations, but it’s good to have a large gap between the two. The 10- and 20-day moving averages aren’t distinct enough to offer value in this scenario, for example. The 10- and 60-day moving averages, though, are a popular pairing for this strategy.

10. Pay Attention to Changes in Gold Production

In the past few years, gold mining hasn’t seen any dramatic shifts. It’s not necessarily related to stagnant demand for gold: Although gold is in demand and has seen overall mining production increase over the past decade, today’s gold mining efforts face higher costs due to the challenges of accessing underground gold reserves in hard-to-reach places.

The most accessible gold reserves—at least the ones that are currently known—have already been mined and placed into the global supply. The remaining gold reserves represent much more expensive mining operations, which decreases profit potential for mining businesses.

But limited production isn’t a sign that gold is poised for a decline.

In fact, the opposite is true: Stable gold production could put the squeeze global demand and lead to higher prices, especially if central banks and other common buyers of gold start seeking out this asset.

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Risk Disclaimer

There is a very high degree of risk involved in trading securities.

With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection, and market volatility that may substantially affect the price or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses. Learn more at Wikipedia.

All investments involve risks and are not suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against the loss, in a down market.

There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. More details here.

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