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Trading gold has never been an easy subject, because this metal does not move the way the other commodities or the other currency pairs on the Forex market do. What follows is a set of lessons and of common approaches to trading gold.
Understand the size of a gold contract before you trade
At most brokers, 1 lot of XAU/USD corresponds to 100 ounces of gold. That means that when the gold price moves by 1 USD, a 1 lot position gains or loses 100 USD, while a 0.01 lot position (1 ounce) gains or loses 1 USD. The gold price has been above 3,000 USD per ounce, so the price can swing several tens of USD within a single day; on a 0.1 lot position, a 30 USD move works out at a gain or a loss of 300 USD. Check the contract size at your own broker, and work out a genuinely small position size from your stop loss distance before you enter.
A great many investors who take up gold hope to make a quick profit. Besides learning from the experience of the people who went before you, you should also look back at the reasons for your own failures, so that you see clearly what you are missing and adjust accordingly. A disciplined strategy, combined with experience of your own, is something you cannot do without.
Today I want to share a number of lessons from trading gold.
Picking the moment in the year to trade gold
Unlike waiting for the moment a technical indicator gives you, waiting for the moment to trade gold means waiting for the moment in the year. Moves in the gold price correlate with its seasonal pattern: gold can strengthen at certain points in the year and weaken at others. This, though, is only a statistical tendency drawn from the past, and in a great many years the gold price has gone against the pattern.
Gold usually tends to rise in the first quarter of the year, and in the closing months of the year as well. Seasonality should be treated as background information and nothing more.
If you do want to use it, consider it only when the price really is following the seasonal pattern, still require a technical signal to confirm, and always place a stop loss. Do not buy simply because “it is January”.
It is also worth knowing that the LBMA Gold Price benchmark is set twice a day in London, at 10:30 and at 15:00 London time. Around those moments, and when the US session opens, liquidity in gold is usually higher and the price moves more sharply; that can create an opportunity, but it raises the risk as well.
On top of that, being in a hurry to make money right away sweeps you along with the euphoria of the market, and that leads to the regrettable mistakes of buying in haste in an expensive price zone and failing to get out in time when gold goes into a deep pullback. Learn to control yourself before you step into the market.
Trading around the news that affects the USD and gold
Beyond the economic figures on the economic calendar (US figures above all, such as Non-Farm Payrolls, the CPI and Fed rate decisions), gold is also affected by political events, conflicts, disasters and crises, because it is treated as a safe-haven asset. Read more: “11 factors that move the world gold price”.
The way the gold price reacts to news does not always follow ordinary logic. You should not open a position immediately before a release, or at the moment of the release, because the price can jerk violently in both directions; if you do want to trade the news, wait until the price has settled and has a clearer direction after the figure has been published.
One specific case is that when the stock market falls sharply the gold price usually rises (although there are times when gold is sold off alongside stocks too, as in March 2020), and that can be a background against which to consider a long position (you still need a technical signal and a stop loss); you should also follow the economic calendar, since economic events are released on a schedule that is published in advance.
Timing can be the line between success and failure in trading. However perfect your strategy is, if you cannot match it to the circumstances and cannot make use of the opportunity, you will still fail. You can visit well-known sites such as Forexfactory or Investing.com to follow the news.
Trading on the relationships between markets
The products in the foreign exchange market are usually connected to one another. The strong inverse correlation between gold and the US dollar, meaning that gold and the US dollar move in opposite directions, is hardly a secret. A sign that the USD is weakening therefore usually supports the gold price, and the other way round. Even so, there are moments when the USD moves in the same direction as gold.
Gold also tends to have an inverse relationship with US real interest rates (the bond yield minus inflation): because gold pays no interest, when real rates rise, holding gold becomes less attractive and the gold price usually comes under pressure; when real rates fall, gold usually finds support. Gold buying by central banks has been an important factor in recent years as well.
On the other side, gold is positively correlated with the AUD/USD pair. Australia is one of the largest gold-mining countries in the world and gold is an important export for it, so when the gold price rises the AUD usually finds support. This correlation is not fixed; there are times when it is the policy of the Reserve Bank of Australia (RBA) that drives the AUD instead.
The particular nature of gold calls for an approach that suits it. You can take a correlation or a seasonal factor as a reference, but look at the whole set of factors that affect gold, always place a stop loss, and use a small position size, because gold moves violently. Read more: Important points to watch when you buy and sell gold.
Investors need patience and need to stick to their trading plan, and to practice on a demo account before trading gold with real money.
