Introduction to the Gold Market

Trading Gold in 2020 is as popular as it has ever been and, with the recent high market volatility, the trade of gold has spiked in volumes across most online brokers.

Trading gold search trends - source: Google Trends data
Gold trading Google searches at an all-time high source: Google Trends

In this article, we will dig into the fundamentals that market participants need to know about when learning how to trade gold and other precious metals. How to trade gold, and what you need to know to get started.

One of the “great” Technical Analysts, Martin Pring, once said:

The more I work with markets, the more it becomes apparent that prices are determined by one thing and one thing only, and that is people’s changing attitudes toward the emerging fundamentals.

Martin Pring

Gold really is the King of all commodities. If you understand how to trade Gold, then you will understand all other bullion.

As we will discuss in this article, it only makes sense to compare the behaviour and properties of other metals to that of Gold.

Why Is Gold so Important?

Investment pyramid, Gold foundation
The Investment pyramid, Gold, the Foundation

Gold acts more like a financial asset than a physical commodity, even though 80-90% of the global production is used for jewellery and high-tech industries like specialised electronics.

Gold tends to have an impact on other precious metals like Silver and Platinum, dictating their price. This occurs slightly more so with Silver because Platinum tends to be angled more towards industrial use.

Why Is Gold Considered A Precious Metal?

Historically

Before providing you with methods and tips on how to trade gold, you should know why it’s an asset that is considered to be so important.

Since ancient times, gold has been a highly valued and sought-after precious metal. Its scarcity, the difficulty in locating it and the hard work involved in its mining has only added to the demand and the necessity for traders to learn how to trade gold.

In centuries that have passed, gold has been a universal currency for merchants around the globe and still is to this day. As a result, many wars have been fought with the purpose of controlling gold mines and the gold trade.

Many people are fascinated by such a luminous and luxurious metal. Being known for its anti-corrosive properties, gold is widely used in the production of jewellery and decoration.

Recently, with the booming industry of smartphones and other technologies, gold is now in demand as a useful electrical component. Consequently, the desire to trade gold and the necessity to learn how to trade gold has continued to remain steady.

Gold Has Outperformed All Major Fiat Currencies Over Time

Gold Has Outperformed All Major Fiat Currencies Over Time (Gold since 1900)
Relative Gold Value vs. Major Fiat Currencies since 1900

In Modern Times

There are 4 main reasons that Gold remains the most important precious metal in the world as of August, 2020:

  • Central Banks hold large amounts of Gold as part of their official reserves, and also buy & sell large amounts of the metal-based on their future expectations for the economy
  • In times of risk aversion, traders & investors stop thinking about “return ON capital” and concentrate on “return OF capital”, shifting capital away from risky assets and searching for security in Gold
  • USD trends affect Gold since the metal is priced in USD/ounce. Naturally, lower USD prices tend to increase the relative value of Gold (and vice versa); and
  • Inflation trends also tend to affect the demand for Gold, since the precious metal is seen as a hedge against inflation.

What Moves the Price of Gold?

Upward or Downward Movement:

Let’s now take a look at what moves the price of gold in the market.

Like any other instrument, supply and demand are one of the factors that push the price of gold up or down.

In times of recession, and high tensions in the geopolitical environment, we notice that gold rallies. It’s considered to be a safe-haven metal.

In such instances, investors rush to trade gold in order to avoid losses in the stock markets. However, this is not the only case where we notice a high demand for gold. We also notice a price appreciation in booming periods. People have the capability (and, more importantly, the money) to trade gold, whether that’s for investment or leisure. In times like these we find the desire to learn how to trade gold spikes significantly.

Gold graphic - How to trade Gold - Times of leisure
Gold Price – During times of leisure, people often buy gold

We’ve seen what makes the price of gold move upward. Now, let’s see what pushes the price of gold down. 

There are many potential reasons behind a downward movement in the price of gold. However, a major factor will always be strategies and decisions made by central banks across the globe. In times of slow economy, central banks sell their gold reserves to boost the economy. This huge supply in the market leads to a fall in the price of gold and a lack of consumer desire to learn how to trade gold successfully. 

Producers of gold can also influence the price, for example, if there is a huge supply of gold in the market, the price will decrease.

The World Gold Council each year publishes its annual report. This gives you the ability to see the amount of gold that’s been mined and compare it to the previous year. This is a useful tool for the purposes of comparison.

How Central Banks Influence the Price of Gold

All Central Banks own Gold. Among other reasons, this is due to gold’s historical association with banknotes and coins. In the past, a coin or banknote could be redeemed in exchange for gold.

Gold Bullion held at The Bank of England. The Bank of England say they hold around 400,000 bars of gold, worth over £200 billion
The Bank of England’s Gold reserves – Gold Bullion source: bankofengland.co.uk

These days, the gold reserve is justified by the fact that the value of Gold behaves differently than the foreign currency reserve.

Gold is held by reserve managers for diversification purposes, since both the value of Gold and foreign currency reserves are more stable together than the value of Gold reserves and foreign currency reserves are separately. Gold can also be used to fund emergency liquidity assistance or foreign exchange interventions, among other things.

Furthermore, Central Banks pay particular attention to general economic conditions when deciding how to trade Gold in their possession. This means that Central Banks have enormous pricing power in Gold, which could be potentially dangerous to other market participants, and to Gold producers. 

Collectively, at the end of 2014, central banks held around 30,900 tonnes of gold: approximately 20% of all the gold ever mined. These holdings are highly concentrated in the advanced economies of Western Europe and North America, a legacy of the days of the gold standard.

Going for Gold - The World's Central Banks bought more gold than any first quarter for six years (Q1 2019)
“Going for Gold” source: World Gold Council (Bloomberg)

In recognition of this, major European central banks signed the Central Bank Gold Agreement (CBGA) in 1999, limiting the amount of Gold that signatories can collectively sell in any one year. There have since been three further agreements, in 2004, 2009 and 2014.

But what about the other central banks that are not part of this agreement? Without a doubt, the Russian and Chinese central banks are also key players. For example, both Central Banks raised their allocation to Gold in 2015.

Central Banks have the power to influence the price of Gold, more than any other driver out there. However, the question to ask is: do they actively seek to manipulate market prices?

In a way yes…but in a good way!

The CBGA is meant to stabilise Gold prices: European Central Banks tend to be buyers during declines and sellers during upticks. Central Banks generally want to remain under the radar with their transactions.

How Risk Aversion Affects the Price of Gold

The “risk on-risk off” dynamic tends to have more importance for intraday and intraweek trading. In times of sharp stock market declines, investors flee towards safe assets and consequently, they attempt to discover how to trade Gold in a way which secures their financial portfolio.

This dynamic occurs on short time frames as well as larger time frames, so intraday traders should also be aware of this dynamic.

When learning how to trade Gold you need to understand how Gold is priced and how the USD influences this.

Since Gold is quoted in USD/ounce, it should be logical that dollar strength or weakness will affect Gold prices. 

In particular:

  • Gold prices tend to increase when the USD gets sold. That is because, in relative terms, Gold becomes more expensive.
  • Gold prices tend to decrease when the USD gets bought. That is because, in relative terms, Gold becomes cheaper.

Below we have the visual description of this dynamic.

Gold Price and USD correlation, 10-year chart. Source: macrotrends.net
Gold prices and USD correlation

How Inflation Dynamics Affect the Price of Gold

Inflation describes the general increase in the price of goods and services. It’s the reason why 100 USD bought more in the 1990s than today.

Inflation erodes the value of savings over time and decreases the burden of debt to the borrower over time. This is the general reason for interest being applied in both cases.

Lower unemployment or stronger economic activity is seen as a potential inflationary trigger. Some other triggers are increases in commodity prices or workers wages.

Changes in the Consumer Price Index (CPI) correlate directly to changes in the price of Gold. Investors actively seek “tangible goods” as an asset to hedge with against inflation. Consequently, a consumer’s desire to learn how to trade Gold increases. There is also a psychological component to this behaviour: currencies, stocks, bonds and ETFs are all “intangible” assets of investment. They’re all “pieces of paper” at the end of the day.

USD inflation since 1799. Source: Investopedia
USD inflation over time

So, when the future outlook gets gloomy, investors tend to remember this fact and search for safety in “hard assets”. And that is why hard assets, such as oil, natural gas, silver, farmland, diamonds and real estate etc., all tend to be inversely correlated with stocks and bonds.

After having seen these 4 price drivers behind trends in Gold, one might ask: why does it seem that Gold follows each of the 4 main dynamics sometimes, while other times it does not?

The answer is that like currencies, for example, Gold does not trade on one single driver all the time. Depending on the state of the markets, each driver can come into play, and then another one takes its place equally as fast. That’s why it takes time to master how to trade Gold and other commodities (and currencies for that matter).

How Does Gold Perform During Global Market Instability?

Gold generally performs well during a global crisis. Pandemics (e.g. COVID-19), wars and terrorist attacks, for example, often make investors want to learn how to trade Gold due to its comparative safety.

Stocks sink, resulting in traders and investors snapping up tons of gold. Then, when stocks surge, investors continue to trade gold because a) they’ve learned how to trade gold; and b) it has become a valuable commodity thanks to market demand.

Gold is normally a safety net or a market ‘tell’. During volatile markets, Gold generally benefits at the expense of other assets.

How to Trade Gold

There are four major methods used to trade Gold

How to Trade Gold? Four ways to trade gold.
How to Trade Gold? Four Methods to Trade Gold

Physical: This is considered an “old” method when discussing how to trade Gold. Some cultures, particularly in Asia, still acquire Gold physically. They believe it is a metal that never loses value and its price always appreciates.

CFDs: This stands for “Contract For Difference”, which is the most common method used when learning how to trade Gold. A CFD gives you the opportunity to trade Gold based on the rising and falling of the price, using leverage to magnify your profits. It’s worth noting that this means you should be careful because leverage can result in incurring significant losses on your account.

ETFs: An ETF (Exchange Traded Fund) is a fund that consists of one asset (in this particular case, of course, that one asset is Gold). Gold ETF is a type of derivative contract that is backed by Gold and reacts as an individual stock. Similarly, like CFDs, when you buy ETFs you don’t own the Gold physically.

Futures: Futures are contracts set between a buyer and seller, which puts a pre-defined date in the future where the buyer purchases the Gold based on the price agreed on the set date. CME is the largest exchange that enables you to find Gold futures for speculation or even hedging purposes.

Please note that the above list is not all of the available methods you’ll need to know when learning how to trade Gold.

The most common way to trade Gold is using CFDs. There’s a chance to make huge profits using CFDs, thanks to leverage. However, this same leverage means running a high-risk strategy which could become expensive. It’s a classic double-edged sword.

A great way to learn how to trade Gold, and how to predict the Gold market movement is to learn to read charts. This is known as “technical analysis“.

At Trade the Day we have an entire section of the website dedicated to Technical Analysis and Commodities Trading, which the instrument “Gold” falls under.

Advanced Technical Analysis

Classic Method

We now need your full attention to start digging deep into how to trade Gold using charts. We’ll start slowly with the classic and simple method that consists of trading the trend-line and combining it with some other signals. 

Below we have a screenshot showing our first analysis using a trend-line technique with the help of divergence.

Gold/USD Chart - Gold Spot / US Dollar on SAXO bank live trading
Gold Spot / U.S Dollar (1D – SAXO) Chart by tradingview.com

First, we noticed a downward trend-line where the price tried to breach it and break upward more than three times. In the fourth instance, the pair succeeded in breaking through and forming a pattern called ‘three white soldiers’. This is a bullish pattern that exists above the trend-line and confirms the beginning of a new trend. In addition, if we look closely at the graph we notice a divergence between the oscillator and the price. The latter showed a lower low, while the oscillator values marked a higher low. It’s a clear bullish regular divergence. 

We advise you to keep your technical analysis as simple as you can. To master your technical analysis skills, you can find more information within our education section.

You can learn more about other technical analysis techniques, such as the Elliott Wave Principle, by checking the Education section of the Trade the Day website. As mentioned above, these methods are essential learnings in your quest to discover how to trade Gold successfully.

Advanced Method

Now, we will move to a more advanced technique for learning how to trade Gold that helps you to predict the next move of the Gold price. Most of the studies show that Gold is positively correlated with the Aussie and the Swiss Franc. 

Conversely, our analysis showed that the yellow metal displayed a high positive correlation with DXY. We plotted two charts as seen in the “figure 3”. The one with candlesticks belongs to Gold, and the other is a line chart showing the movement of DXY (US Dollars index).

DXY Gold chart - 1D (1 day) Gold chart
DXY and Gold Chart

If we look closely at the chart, we can see how these two charts are correlated and react in a similar way.

In this example, we noticed that the DXY index made a small correction then continued its direction upward (see first arrow). What happens next is the Gold made the same move, but with the lag of a few days.

This is not the only example that has been found; to the contrary, we noticed many others through our analysis.

In fact, we can conclude that Gold reacts based on the DXY direction. So, to have a better idea which direction the Gold might take, you should keep an eye on the DXY when you are beginning to learn how to trade Gold.

Using this strategy, with a combination of other signals seen before, will help you make real money out of the Gold market and learn how to trade Gold successfully.

Fundamentals Behind Gold

We’ve already walked through how to trade Gold based on technical analysis. Now, it’s time to see how to benefit from the noise in the market to make some money. As some analysts state, technical analysis alone is not enough when trading. You should mix it by taking note of the fundamentals that make the yellow metal volatile. 

Here’s an example of how Gold reacts to global new that has negatively impacted the markets.

How news affects the price of gold
Gold and news

In the image above, the highlighted yellow circle indicates a spike in Gold price. If we ask ourselves why we notice it on that particular date, it’s because there was high tension between the United States and Iran. The American Army struck the convoy of Qasem Sulaimani with missiles, resulting in his dead. This air-strike caused significant tension between the two army forces, which some thought was about to start a war. 

What happened next was that investors rushed to the safe-haven metal, raising the price to $1611 USD at the beginning of 2020. After this event, there was another news story that shook the market which was the outbreak of Coronavirus. This disease started to push the price again to new highs, especially after spreading to more and more countries. By regularly following and keeping up-to-date with local and global news storied, you begin to understand what impacts the price of Gold and discover how to trade Gold, as you may have the opportunity to make money out of others’ misfortune… Unfortunately.

Even though the news affected the yellow metal price in that specific example, it’s not always that easy to predict the direction. There are times when the market does not follow the rules mentioned above. After seeing two examples of when the price of Gold heads upward, you may find yourself asking: when does this asset depreciate?

The price of Gold usually falls in times of recovery or when there’s a booming economy. In these circumstances, investors tend to put their money in stock markets and disregard investing in Gold. A good example of where the price of Gold depreciated is the period after the 2008 Global Financial Crisis (GFC). 

Now that we’ve demonstrated the fundamentals behind how to trade Gold, let’s conclude and give you some tips and recommendations.

How To Trade Gold: Tips and Recommendations

We strongly emphasise that trading based on technical analysis alone is not enough, and neither is trading based on fundamentals. 

As a trader, you should combine both methods when beginning your practical education in learning how to trade Gold. We recommend that you follow market sentiment too, so you can follow the mass psychology of traders. Be aware of being (too) greedy in the market. Limit your losses by using strict risk management strategies.

Frequently Asked Questions

How Do I Start Trading in Gold Today?

Sign up to a broker that offers Commodities trading (specifically Gold), set up your online trading account and select the financial product you wish to trade.

What’s the Minimum Account Investment Needed to Trade Gold?

You can start trading Gold with as little as $100 USD, via CFD products offered by many brokers.

When trading Gold, minimum account requirements can vary from country to country and between brokers.

How Can I Make Money Trading Gold?

Trading Gold can be a very profitable exercise.

As with all trading, you will need an effective strategy to anticipate market trends. If you have made a plan and have a strategy you wish to execute then, plan out when you will make your trade.

Gold is considered a ‘safe haven’ asset, however Gold, as with all trading, carries a high level of risk – there is never a guaranteed return.

Practice, learn, plan, manage your risk, research, trade.

Is Trading Gold Suitable for First Time Traders?

Gold is a popular asset to start trading with. Using all of the resources available on Trade the Day you can easily learn to start trading Gold today.

Gold is a very popular commodity to trade for all levels of trader.

Which Are the Best Brokers for Trading Gold Online?

We recommend easyMarkets (sign up here) and AvaTrade (sign up here) for trading Gold.