Education > Trading tools & strategies > A guide to trading gold

A Guide to Trading Gold: 9 Tips for XAU/USD Traders

As traders look for stable investments to hedge against inflation, market instability, and other geopolitical factors, gold (XAU/USD) has gained popularity as a valuable asset. Traders use gold as a way to hedge against other investments or as a safe haven that provides consistent returns over time, while being more resistant to dramatic swings in valuation compared to many other currencies.

However, despite the high inflation rates experienced globally over the past year, gold prices have remained relatively weak. This has led to questions about whether the precious metal is still an effective hedge against inflation.

How XAU/USD Pairs Can Benefit Your Forex Trading Strategy

Gold trading, particularly through the XAU/USD pairing offered by many forex brokers, has become an increasingly popular strategy for traders seeking stable investments to hedge against inflation and market instability. The consistency of gold prices over time, even during periods of economic inflation, has made it an attractive asset for traders looking to diversify their portfolios.

As the COVID-19 pandemic continues to impact the global economy, more governments and forex traders are turning to gold as a safeguard against inflation and potential losses. The printing of more currency can lead to a decrease in its value relative to stable assets like gold, making it a reliable hedge against currency depreciation.

The stability of gold prices can be attributed to its relatively fixed global volume, which cannot be drastically increased like paper currency. As such, it remains a valuable asset for investors looking for a reliable long-term investment strategy.

Comparison of Forex Trading and Gold Trading

Gold trading is a popular choice among traders looking for stability during uncertain economic times. This makes it a preferred asset for those seeking protection against market volatility and inflation, with a focus on long-term market trends. In contrast, forex trading tends to be more focused on short-term market activity.

The Value of Gold in Investing

Gold is considered one of the most popular precious metals for investment, and for good reason. It can help investors diversify their portfolios, which is especially important during times of economic uncertainty. Despite occasional volatility in the gold market, it has been considered a safe haven across numerous countries and markets for a long time.

Factors Affecting Gold Prices and Understanding Gold Futures

Gold prices are influenced by various factors such as trading activity, economic inflation, supply and demand, and investor sentiment. The level of trading activity and demand for gold can increase its price, while economic inflation and oversupply of the metal can decrease its value. In addition, investors’ buying and selling activities, driven by market sentiment and global events, can also cause short-term fluctuations in gold prices.

What Are Gold Futures?

One way investors can take advantage of these price movements is through gold futures contracts. These legally binding contracts allow buyers to purchase a specific amount of gold at a predetermined price on a specific date, while sellers agree to deliver the asset under those predetermined conditions. Gold futures are traded on exchanges like any other futures contract, and can be a useful tool for hedging against price fluctuations and managing risk.

What Are Gold Options?

Gold options are financial contracts that use gold or gold futures as their underlying assets. They involve two parties agreeing to a possible transaction for a specified amount of gold at a predetermined price, known as the strike price, on or before a set expiration date.

Call options on gold give the holder the right to buy the metal at the predetermined price before expiration, while put options give the holder the right to sell. Gold options allow traders to speculate on the future direction of gold prices without the obligation to buy or sell the actual metal.

Getting Started with Gold Trading: 9 Tips how to start

If you’re interested in trading gold and looking to maximize potential profits, here are nine tips to keep in mind:

1. Consider New York trading hours when day trading.

Gold is traded almost 24 hours a day, but liquidity is highest during New York trading hours. Whether you prefer to trade during or after these hours depends on your goals. During peak activity, there is high liquidity and low volatility, which is ideal for safe-haven positions. Off-hours trading can offer the extra volatility needed for scalping strategies, but it also increases relative risk.

2. Target previous highs and lows for simplified analysis.

Simplify your analysis by focusing on previous highs and lows when targeting buy or sell opportunities in the XAU/USD trading pair. Since gold tends to trade in a range, traders can open a position when it’s trending up and aim for a previous high as their sell price or vice versa. However, this strategy may not be suitable for day trading, as it may take time for the targets to be reached.

3. Consider geopolitical implications on currencies when trading gold.

Take geopolitical implications on currencies into account when trading gold. Gold is considered a safe haven asset that can protect your liquid assets during political or economic uncertainty. Gold is also strongly correlated to the US dollar and other stable currencies like the Japanese yen, making it a reliable means of asset protection.

4. Use the symmetrical triangle pattern for analysis.

Use the symmetrical triangle chart pattern for analysis. This simple chart pattern suggests a period of consolidation that may lead to a price breakout. It features the convergence of two trend lines progressing at a similar slope but in opposite directions. When combined with other technical indicators, such as liquidity or the relative strength index, the symmetrical triangle can provide additional confirmation for potential price breakouts and increase traders’ confidence in placing an order on XAU/USD.

After the two trend lines converge in the symmetrical triangle pattern, a stop-loss order can be set just below the descending trend line. If the price of XAU/USD successfully breaks out, sell orders can be placed.

5. Track industrial and commercial demand for gold.

Gold prices can be affected by increased market demand, as the global supply of gold is fixed. Demand for gold can come from various sources, including industries that use gold in consumer products, such as the medical and tech industries. Additionally, consumer demand for gold jewelry in foreign markets, where it is viewed as both a luxury good and investment asset, can also impact gold prices.

6. Monitor Central Bank Buying for Trading Opportunities

Central banks are major players in the gold market and their actions can provide valuable insights for traders. Central banks tend to buy gold as a hedge against volatility in certain currencies. For instance, when China and Russia made significant investments in gold, it reflected their concern about the future price of major global currencies such as the U.S. dollar and the euro.

Monitoring central bank buying can tell forex traders two things. Firstly, it indicates that governments believe major currency values may dip, which could prompt traders to move a greater percentage of their investments into less volatile funds. Secondly, increased central bank buying can cause an uptick in the price of gold, presenting a potential opportunity to profit from short-term trends.

7. Track Real Interest Rates

Gold prices have a strong correlation with real interest rates, with prices typically rising as interest rates decline and dropping as interest rates rise. To determine the real interest rate, subtract the inflation rate from the nominal interest rate, resulting in a percentage gain or loss that considers inflation.

When the real interest rate falls below 1%, gold prices tend to rise historically. As a trader, monitoring changes in the real interest rate over time can help you identify a strong buying opportunity, especially for long-term trading strategies.

On the other hand, a real interest rate above 2% tends to deflate the value of gold. Experts recommend selling XAU/USD when the real interest rate reaches this threshold.

8. Using Moving Average Crossovers

Gold prices tend to fluctuate within a range, which can cause different moving averages to cross over on forex charts. Many traders look for buying opportunities when a shorter-term moving average crosses over a longer-term moving average. For instance, if the price point for the 20-day moving average crossed the 50-day moving average, it would signal a buying opportunity for long-term traders.

In the example of the XAU chart below, the 50-day moving average moves above the 100-day moving average in early April 2020, as the COVID-19 pandemic began to have a significant impact on economies worldwide. As expected, this moving average crossover predicted a considerable increase in the value of gold in the following months.

Using moving average crossovers to inform trading decisions involves selling when a short-term moving average falls below a longer-term moving average. It’s important to note that there’s no one-size-fits-all approach to choosing which moving averages to use, but generally, larger gaps between the two are preferred. For instance, a 10-day and 20-day moving average might be too close to be useful, whereas a 10-day and 60-day moving average could be a better option.

9. Consider changes in gold production carefully.

While gold mining has not experienced any significant changes in recent years, this is not due to a lack of demand for gold. Despite an increase in overall mining production over the past decade, accessing underground gold reserves in remote locations has become increasingly challenging, leading to higher costs. The easily accessible gold reserves have already been mined and added to the global supply. Mining the remaining reserves is much more expensive, which decreases the profit potential for mining companies. However, limited production does not indicate that gold is on the verge of decline. In fact, stable gold production could create a demand squeeze, resulting in higher prices, particularly if central banks and other common gold buyers start looking for this asset. While gold prices are influenced by different factors than traditional forex currencies, the same principles for evaluating forex currencies still apply. Forex traders should consider XAU/USD as a dependable safe haven for investment activity and a potential source of profit if they can competently analyze gold’s price movements and create a trading plan to capitalize on this chance.

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