How to Trade Gold — The Ultimate Guide

Gold is one of the most traded commodities in the world along with oil, natural gas, and grain. But this precious metal is also one of the most interesting assets because it is considered to be a major safe-haven asset and is used to hedge the risk of inflation. In addition, gold is widely used in various industries including jewelry, dentistry, medicine, cell phone manufacturing, etc.

If gold trading was once difficult because you had to buy, sell and store the metal itself, today anyone can buy and sell gold wherever they are in the world.

In this guide, you will find everything you need to know about trading gold. We will cover the factors affecting its price, benefits, risks, and trading strategies.

If gold trading was once difficult because you had to buy, sell and store the metal itself, today anyone can buy and sell gold wherever they are in the world.

In this guide, you will find everything you need to know about trading gold. We will cover the factors affecting its price, benefits, risks, and trading strategies.

The History of Gold Trading

Gold as an asset has long been of value to mankind, as evidenced by archaeological excavations during which gold jewelry and coins have been found. In 4,000-5,000 years B.C., of the seven first metals discovered by humans, it was gold that gained the status of precious metal, becoming the basis of the economy and monetary system. 

From ancient times till the XIX century the value of coins of any state was defined not by the face value, but by the gold content, which in the epoch of "paper currency" also acted as a "gold standard", which was canceled in 1971 in the USA. This was followed by a global reform of the currency market, which led to the emergence of the forex market after the Jamaican meeting of G7 leaders.

The consequences of the decision - to value all currencies through the U.S. dollar, adopted by the heads of the world's leading nations in the town of Kingston. When the International Monetary Fund officially ratified the "unpegging" of currencies from the "gold standard" in 1978, the U.S. Federal Reserve sharply reduced the proportion of dollars in circulation that are backed by gold. Since then, the number of unsecured printed bills has only grown.

The low gold backing of the 1971 issue of national currency was a major motive for the U.S. government to abandon the gold peg. At that time there was a huge amount of cash dollars in Europe, received by states in the Marshall Plan as loans for post-war reconstruction, which occurred by the middle of the 20th century.

European countries were willing to pay back not only the loans but also the paper American notes, demanding real precious metal in return.

What Moves the Price of Gold?

History shows that investors consider various fundamental factors when trading this asset. Of course, the intrinsic value of the metal is limited, but every year there is less and less of it on the ground, and then it is only a matter of time before its value increases. Although the price of gold is not controlled by any central authority, some factors affect the movement of this precious metal's quote. So, let's take a look at what the price of gold depends on.

Inflation

Inflation is often a sign of a growing economy during which central banks put more currency into circulation. This, in turn, leads to devaluation as more bills become available. Investors subsequently rush into gold, which retains its value during a period of higher inflation. Moreover, such instability often leads to an increase in the price of gold. Conversely, during deflation, gold is no longer used as a hedge and its price falls as investors move into other assets.

Global Economy

Political instability contributes to the uncertainty of global growth. All of this, of course, affects the price of gold in the same way that it does when inflation rises. When central banks increase their reserves, they limit the supply in the market, which consequently raises the quotes. Conversely, if a country decides to sell precious metal and floods the market with it, of course, this affects the price of gold by reducing its value. Moreover, central bank pressure tools (interest rates as well as monetary policy shifts) change the underlying global economic conditions, which in turn can affect gold.

Supply and Demand

Most of the global demand for gold is in the jewelry market (50%) and for investment purposes (40%). Increased demand with low supply can lead to higher prices. On the other hand, an oversupply with weak demand leads to a decrease in the price per troy ounce. If demand for the precious metal is high and supply stays low, the price of gold will rise - and vice versa.

U.S. Dollar

The precious metal is denominated in dollars: this means that the dynamics of the dollar have a significant impact on the price of gold. Under normal circumstances, the exchange rate of gold is inversely related to the U.S. dollar, meaning that when the dollar falls, the price of gold goes up. The reason is that when the U.S. currency begins to lose ground, traders move into other financial assets. Such an increase in demand pushes prices up.

Geopolitical situation

The price of gold is also affected by what is happening in the world in general and in the U.S. in particular. The metal's status as a popular investment safe haven means it feels good in times of geopolitical turmoil. During wars, trade disputes, disruptive national elections, and other major events, demand rises as investors look for a stable store of value, causing gold prices to rise.

Volatility

Volatility is the strength of market dynamics, or simply the degree of price fluctuation activity. This parameter is best tracked or measured using the ATR (average true range) indicator. Usually, when the daily ATR is higher than the average over the last 15 days, the metal can be more volatile, making it attractive to intraday traders. Gold is a commodity that has strong trends most of the time, making it a suitable asset for trend-following strategies and channel-breaking trading. The metal tends to move through strong long-term trends. For example, the gold market will be considered bullish when the monthly closing price is at its highest level in the last six months.

Trading time

The price of gold is also influenced by the period of the trading session. For instance, gold is almost always rather liquid, but it gets the most popularity at the beginning of the London and the opening of the New York sessions. The overlap of London and New York markets is probably the most active period for gold quotes. More liquidity and volatility await traders here.

Why Trade Gold in 2022

Traders buy gold for a variety of reasons, but the most common ones are the following:

Protection against inflation

Gold can be a reliable way to hedge against weakness in various economies, especially the U.S., because of its global reach. For example, during the high inflation of the 1970s, the price of gold made up for it. By definition, paper currencies lose their purchasing power during periods of inflation. All other things being equal, gold retains its value. Nevertheless, gold can also lose its value relative to paper currencies.

A safe haven from global instability

Gold tends to work well during global crises. For example, wars, terrorist attacks, and pandemics often lead to security. Gold can benefit at the expense of other assets in turbulent times.

Speculation on rising gold prices

Traders who are optimistic about the economic prospects of emerging economies such as China and India may see gold trading as a way to benefit from this viewpoint. Historically, gold has played an important role in these countries, and greater wealth could lead to an increased demand for gold.

How to Trade Gold

There are many methods to trade gold online, including spot and futures markets, as well as options, funds, and gold mining stocks. Precious metals such as gold are highly liquid. It is interesting to note that the daily trading volume of this yellow metal is higher than that of most currency pairs, except for flagships like EUR/USD, USD/JPY, and GBP/USD. This means that the cost of starting to trade gold is often quite small. Available tight spreads and high liquidity make speculation on the price of gold popular with a large number of CFD traders. Many investors put their capital into gold, viewing it as a safe-haven asset. Traders move their funds into safe investments, at times of extreme market volatility, or during dramatic downturns. Investments in metals help them reduce potential risks because gold prices tend to rise during turbulent times. Of course, the transaction options for those who just want to preserve capital by investing in gold and those who want to transact almost every day are completely different. Once you choose the right one for you, develop a strategy for using it. For example, in almost all cases you will have to keep track of news and events that affect gold as well as mining stocks.

Physical metal (bullions or coins)

Bullion is a group or large piece of precious metal that is measured by weight. The advantage of buying physical gold is that you are fully responsible for it: in some cases, you can even take it out of storage and put it in a personal safe. But not all banks are willing to do that: most often, you will not be able to take the bullion out of the branch, and it will still be listed on your metal account as a title with a changing price. Of course, return is virtually out of the question here: it's more of a way to preserve capital, sometimes (but not always) outpacing inflation.

CFD on spot gold

This is a trading variant, which is familiar to many traders. CFDs on the value of physical gold are not inherently different from CFDs on any other asset. You try to open buy trades at the lowest price in hopes of it going up, and sell trades at a higher value. The XAU gold market symbol is used to form the XAU/USD pair. This means that when a trader opens a long position in gold CFD, he is simultaneously buying gold and selling the dollar. Conversely, when taking a short position, gold is sold and U.S. dollars are bought.

Gold futures

A gold futures contract is an agreement to buy or sell gold at a specific price in the future. Investors use futures to manage their price risk. Because gold futures contracts are traded on a centralized exchange, they offer more options and flexibility than trading directly in metals. Gold futures can be bought and sold at the discretion of investors and can also be used to properly hedge or diversify holdings of other financial assets. Technically, futures can be used to obtain agreements to deliver a physical commodity, but gold futures traders rarely do so. Typically, CFD trading on these assets takes place instead. Another disadvantage of gold futures is that the contracts are time-limited. This means that they may be subject to rollover fees if an investor wants to pursue a long-term gold investment strategy. In addition, most exchanges offer high minimum sizes for futures contracts, which effectively locks out most retail investors.

Shares of gold mining companies

Gold mining companies are highly correlated with the price of gold and are also highly volatile. If the price of gold changes by 5%, gold mining stocks can start moving in the same direction, adding 10% or more (based on historical data and not an investment recommendation). Some of the best-known players in the gold industry are listed in Australia. These include Barrick Gold, Franco Nevada, and Newmont Mining.

Gold ETFs

Exchange-traded funds (ETFs) can track the movement of gold itself or a basket of publicly traded gold stocks. Investing in ETFs involves greater diversification than making trades in only one company's securities. There are also mini-gold ETFs, which trade in smaller volumes.

Risks Associated with Trading Gold

Online gold trading can be used to hedge economic risks, but trading gold, when an investor speculates on fluctuations in its price, involves high risk.

First of all, gold differs from most traded assets on the market because its value has little correlation with the value of other assets. In addition, the price of gold is influenced not only by supply and demand but also by market news. Therefore, the price of gold can change rapidly and unexpectedly, regardless of the direction of the current trend.

Finally, there is a risk of capital loss, especially in the case of high leverage in CFD trading.

Keeping all of this in mind, you should develop a risk management plan before you start trading gold. Some of the most important risk management techniques for active day-traders include the risk-reward ratio, Stop-Loss, Take-Profit orders, and the one percent rule.

How to Start Trading Gold

If you have read till this part, you may be wondering how to start trading gold. If so, we will tell you how to open an online trading account and start trading gold with AdroFx, a broker that allows you to trade gold without any commission. Keep in mind that the same procedure for opening an online trading account is used by many other CFD brokers.

Step 1: Open an online trading account

The first thing to do is to go to the AdroFx homepage and register to open an online trading account.

You'll then need to fill out a short questionnaire where you'll provide some personal information, including your full name, cell phone number, and email address.

Step 2: Verify your identity

Here you will have to confirm your identity before you can buy and sell gold CFDs. As such, you will be asked to upload a copy of your passport/driving license and a utility bill or bank statement.

Step 3: Fund your account

Now you need to fund your account so you have the capital to trade with. You can use a bank wire transfer, e-wallet, or cryptocurrency, for example, bitcoin, litecoin, or ether.

Step 4: Start trading gold

Log in to the trading platform (Allpips or MetaTrader 4) and start placing orders.

Strategies for Gold Trading in 2022

• News trading. As already indicated, news has a really strong influence on the movement of gold prices. That is why news trading is the easiest and at the same time the most effective way to earn on the noble metal. Any events that worsen the general economic situation in the world can push the XAU/USD price up.
• The correlation strategy is one of the easiest because it does not require deep knowledge of the market and various analyses, observation is enough. The essence of the strategy is to detect patterns in the price movements of certain trading instruments. To find out what is the correlation of gold with which currency, you can use a special tool in the analytical portal NPBFX - correlation coefficient calculator.
• The "Goldilocks" strategy for XAU/USD. To use the strategy, you need a chart with the D1 time frame, on which the Bollinger Bands indicator with a period of 20 and the Stochastic with the following parameters: K Period 5, D Period 3, Slowing 3 are installed. Take-Profit is set at the level of the Bollinger central line, where it is located at the time of position opening.

The following conditions are necessary for the short position: the price reaches the upper line of the Bollinger, and a bearish candle is seen on the chart. The Stochastic lines are directed downward and are located in the overbought zone.

For a long position, the opposite is true: the price is near the bottom line, and a bullish candlestick is clearly visible, while the Stochastic is in the oversold area, with its lines pointing up.

In general, there is no limit to the choice of assistant indicators for gold trading. The only important point is that indicators should not lag. Therefore, gold traders often use modified versions of Stochastic and MACD, as well as Fibonacci levels for setting Stop Loss and Take-Profit.

Tips for Trading Gold

If you want your gold trading strategy to bring you the desired results, then you should pay attention to the following tips for successful gold trading:

• Gold has a wide daily range

Daily ranges of 300-500 pips are common, but there is a "minor" range for fluctuations of 160 pips on average

Gold is volatile

Gold can easily go from 80 to 100 pips in a matter of minutes. Gold trading is also characterized by sharp reversals. Thus, an order that seems quite good may very quickly become losing , and vice versa, a losing order can quickly turn into a beneficial one.

• Support and resistance levels are very helpful in trading gold

In addition to levels, you can also use Fibonacci sequences, which provide a very accurate and consistent way to trade gold.

• Wait until the candle closes on the chart

To make trading decisions about gold, and especially to enter a trade, you must wait until the candle closes on the chart. If you enter a trade based on your assumptions about the closing point of the candle, you risk losing.

• Choose a high time frame

The higher the time frame you choose to trade gold, the more accurate the price swings will be, because they will be free of market noise, and the better the results they will bring you.

• You can trade gold all day long

There is only one time when trading gold is not going well - that is the last couple of hours of the New York session and the first couple of hours of the Asian trading session. By the time Tokyo opens, you can start trading.

• Gold can punish you for trading poorly

In those moments when your gold trading will be based on guesswork, gut feeling, or revenge, then the market will punish you and you will lose, just like in other cases of this kind of trading in the forex market. So use rational thinking, objective judgment, and effective trading tools to make trading decisions.

Conclusion

Before trading gold, remember that this type of trading requires you to have knowledge, skills, trading experience, as well as strict discipline and a clear structured plan. Only a sound trading strategy can help you benefit from gold trading. This financial instrument is difficult for beginners, but those who have experience trading currencies can try their hand at gold trading.

Gold is a good indicator of a trader's skill. By opening a position in gold you can get a return or a loss for sure. If you fail to benefit from gold, then we recommend you adjust your trading strategy in currency pairs.