How to Trade Gold - The Ultimate Guide

Gold is a fantastic commodity asset to trade and one of the best to start trading with. If you’re just getting started on your trading journey or you’re looking at trading additional instruments, trading gold is a great place to begin.

In this guide, we’ll dig into the fundamentals that all market participants need to know about when learning how to trade gold and other precious metals. What you should look for when trading gold, some recommendations when learning how to trade gold, some practical things you can do right now to help your fundamental analysis when trading gold and finish this guide with some gold trading tips.

Remember when trading gold, or any commodity, we recommend trading with a reputable broker. You can view a list of the best gold trading brokers here. Let’s get started with what you’re going to learn:

Introduction to the Gold Market

Trading Gold in October, 2022 is as popular as it has ever been with the recent “highs” (including a new all-time high in 2020) and extreme market volatility, the trading of gold has spiked in volume across most online brokers.

Gold Trading Google Trends Search

Gold Trading – Google Trends Search

Gold is a fantastic commodity asset to trade and one of the best to start trading with. If you’re just getting started on your trading journey or you’re looking at trading additional instruments, trading gold is a great place to begin.

You can learn to trade gold CFDs that are directly tied to the price of gold, or you can even trade gold stocks. Trading gold stocks, such as Jaguar Mining Inc. (JAG.TO), Newcrest Mining (NCM.ASX) and SPDR Gold Shares (GLD), allows you to invest or trade companies invested in gold, such as mining companies.

Trading on the price movements of gold via CFDs using leverage can be done via a wide range of online brokers.

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 guide, it only makes sense to compare the behaviour and properties of other metals to that of gold.

Why Is Gold so Important?

Gold 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, it is used as a foundation of many traders and institutional portfolios.

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?

Gold, Historically

Before providing you with methods and tips on how to trade gold, you should know why gold is 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 effort involved in its mining has only added to the demand.

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.

The History of Gold

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 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, especially with the boom technology boom and the increase in online trading and online brokers, you’re able to trade gold from wherever you are, right now.

Gold is considered a “safe haven” asset meaning during times of high volatility in the markets it’s likely you’ll see a spike in the price of gold due to investors putting their money into the asset.

Gold has had a stable price in “modern history” making it a necessity for serious traders to learn how to trade gold.

Relative value between major currencies and gold since 1900*

Gold vs. Major fiat currencies over time
For thousands of years, gold acted as the “measuring stick of value”, like a physical anchor keeping the money supply in check and governments responsible.

In 1971 US President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value since that point “money” the new “measuring stick of value” has become elastic.

As the US Dollar backs all other currencies as a reserve currency Nixon’s decision changed the world forever.

Gold In Modern Times

There are 4 main reasons that gold remains the most important precious metal in the world as of October, 2022:

  • 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:

Now let’s take a look at what moves the price of gold in the market. Like any other instrument, supply and demand are the main factors that push the price of gold up or down.

In times of recession and high tension in the geopolitical environment, we notice that gold rallies. As previously mentioned, gold is 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 invest in gold and even learn how to trade gold, including the trading of gold itself, spike significantly.

Gold Price - Buying Gold

Gold is considered a “safe-haven” for investments

We’ve seen what makes the price of gold move up. 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 trade gold or 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 and forming a strategy for your investments with gold.

How Central Banks Influence the Price of Gold

All Central Banks own gold. 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. Let’s take The Bank of England, for example. They hold around 400,000 bars of gold, this is worth over £200 billion. (Gold Bullion source: bankofengland.co.uk)

Bank of England Gold Reserves

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 separate. 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. We will show you how you can get signals for this later in this guide.

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.

Gold World Central Banks Ownership

“Going for Gold” source: World Gold Council (Bloomberg)

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.

How Trends in the USD Affect the Price of Gold

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 the gold price and USD correlation dynamic.

Dollar versus Gold Comparison

Gold prices and USD correlation, source: macrotrends.net

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 over time

USD inflation over time (since 1799)

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:

  • They’ve learned how to trade gold; and
  • Gold 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.

Gold Rallies and Slumps

Gold – Rallies and Slumps

How to Trade Gold

There are four major methods used to trade Gold:

How to Trade Gold

How to Trade Gold? Four Methods to Trade Gold

Physical Gold: 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” (CFD), which is the most common method used when both trading gold and 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 but most used methods.

The most common way to trade gold is using CFDs. There’s a chance to make huge profits using CFDs, thanks to leverage.

This same leverage, however, 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 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 updates on Technical Analysis and Commodities Trading, which the instrument “gold” falls under. We also have a detailed section on learning Technical Analysis and how to apply it to your trading.

Advanced Technical Analysis for Gold

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.

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 and learn more about other technical analysis techniques, such as the Elliott Wave Principle, by checking the Education section of Trade the Day.

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).

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.

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 death. 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 $1,611 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.

Gold Trading Strategy (Gold Trading Tips)

As we’ve explored gold, we’ve covered its history, the position it holds in the market as a commodity and how important this is to “market movers”, we’ve covered technical analysis and how to trade gold using charts, now let’s look at a final method that considers fundamental analysis you can use right away.

As we explained above, large institutions such as hedge funds, banks and large financial institutions move the gold market through huge investments.

Frequently Asked Questions

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.

If you wish to find the best broker for trading gold we’ve got a list of our analyst’s picks, here.

You can start trading Gold with as little as $50 USD, $100 USD or $250 USD via CFD products offered by most brokers.

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

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.

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.

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

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