How to trade gold 

What is gold trading? 

Gold trading means speculating on the future price movements of the yellow metal. When a trader believes that the price will spike, he or she would buy gold. Conversely, when the analysis shows that the price is about to drop, a trader would sell gold.

Gold trading means speculating on the future price movements of the yellow metal.

Trading gold allows you to get exposure to one of the largest commodity markets in the world. In addition, since gold is so important for our economy and technological developments, it helps you become a part of something truly interesting. 

Since ancient times, people have been fascinated by the appearance of the shiny yellow metal. Its anti-corrosive properties and the ability to conduct electricity have made gold extremely important in the industry. Around 50% of the global gold demand comes from the jewelry industry.

The importance of gold makes it a favorite asset to trade around the world. The most popular ways to trade gold are with derivative contracts, such as CFDs and futures, but also as physical gold bullion in the form of coins and bars.

Gold’s safe-haven properties

The scarcity of gold and its ability to act as a store of value for thousands of years has made gold an important safe-haven asset in the financial markets. Safe-haven assets tend to attract capital during times of market turbulence, political and social turmoil, and low risk appetite.

Gold has been used as money and a store of value since 1500 BC. The technological challenges involved with gold exploration and production, as well as its limited supply, have helped gold to become a major store of value in modern times.

Take a look at the price of gold with the emergence of the Covid pandemic and the succeeding risk aversion in the markets. In 2020, the price of gold increased by around 15%, reaching an all-time high of $2,074.93 in August of the same year.

Why trade gold?

Gold is a volatile and highly-liquid asset that offers great trading opportunities. Since gold is used as a safe-haven asset during times of global economic stress, it tends to move erratically during the releases of high-impact economic news or during times of political turmoil.

Economic news that comes in below market expectations tends to have a positive impact on gold. Investors move their cash to gold to preserve their capital when risky assets, such as equities, underperform. 

Gold is also owned by central banks around the world as a way to guarantee the stability of their currencies. This is another factor that makes gold extremely important in the financial markets, as the buying and selling of gold by central banks can have a direct impact on its price.

All these reasons make gold a perfect asset for traders to trade. When trading gold with CFDs, traders get also access to leverage, which can magnify their profits significantly if their price prediction is correct.

Why is gold considered a precious metal?

Along with silver and platinum, gold is a valuable and scarce precious metal that occurs in nature. Here’s why gold is considered so precious and why it has been so attractive as a store of value for thousands of years.

The history of gold

Since 4000 BC, the yellow metal has been used in the production of jewelry and as a status symbol. However, it wasn’t until 1500 BC before gold had been first used as money and as a store value, given its scarcity and difficulty to produce. China was among the first countries that legalize gold as a form of money.

Today, gold is used in a wide range of industries, including technology for its perfect electrical conductivity and the financial industry for its high value. The demand for industrial gold has been steadily picking up in the last few decades, although supply has remained somewhat limited.

Gold production has declined by around 25% between 2011 and 2019 as companies started to cut down on exploration costs. Today, it’s estimated that most of the world’s gold supply has already been discovered, and the gold that is still being added to the market is coming from recycled sources.

Major currencies and gold since 1900

The Bretton Woods Agreement established an international currency exchange regime after the Second World War in order to provide stability to the global economy devastated by the war. 

The agreement, which lasted from the mid-1940s to 1973, established a fixed exchange rate between the US dollar and other major world currencies. The US dollar, in turn, was pegged to gold at a price of $35 per ounce. 

However, the surplus of US dollars in the 1960s made it impossible for the United States to maintain the peg to gold, which is why President Richard Nixon announced on August 13, 1971, the end of the Bretton Woods system. Since then, major currencies started to free-float which also enabled the modern Forex market as we know it today. 

Gold in modern times

Gold plays an extremely important role in modern economies. Here are a few points that underpin gold’s value in the modern economic system.

• Central bank holdings. Major central banks around the world hold (and further accumulate) gold in order to guarantee the stability of their monetary systems. Collectively, central banks around the world hold around 31,000 tonnes of gold, which accounts for approximately 20% of all the gold ever mined.

• Industry. Gold is a major metal used in industry, technology, pharmacy, jewelry, and many other industries. Its anti-corrosive and conductive properties mean that demand for industrial gold is likely to stay in the coming years.
• Safe-haven. Gold is an important safe haven for global capital. In times of economic recessions, such as the Global Financial Crisis of 2008, investors tend to park their capital into gold, which in turn pushes its price higher.

Forex vs gold trading

There are many similarities between Forex and gold trading. Among retail traders, both activities involve predominantly the use of CFDs, which track the price of the underlying asset without the trader having to own the asset.

Another important point to consider when comparing Forex and gold trading is the relationship between gold and some commodity currencies. Countries that produce and export gold, such as Australia for example, often see their currency move in tandem with gold.

This means, when the price of gold is rising, this benefits the Australian terms of trade, and the Australian dollar appreciates as a result. Conversely, falling gold prices often lead to falling exchanges rates of the Australian dollar.

It’s important to follow those correlations between gold and other assets when trading the metal. The US dollar is another example, as gold is traded in US dollars. This relationship will be explained further below.

What moves the price of gold

Just like other assets, the main forces that move the price of gold are supply and demand. However, other factors also have an influence on the price of the metal. Here are the main drivers of gold.

Global demand

Global demand for gold has exploded in the last few decades due to advances in technology, computer and smartphone production, and industrial demand. In fact, demand has quadrupled every year since the 1970s, while global gold production has stagnated or fallen. 

The increase in demand and lower supply is one of the main reasons why the price of gold has been steadily rising since the 1970s. Today, around 50% of all demand for gold comes from jewelry production.

Mining production

As you know, mining companies are producing less gold as most of the world’s gold supply has already been dug up. Since 2011, gold mining and refining companies have also tried to preserve cash and have therefore reduced investments in gold exploration, which has also caused a drop in global gold production.

Interest rates

A popular opinion among traders and economic analysts is that higher interest rates lead to lower prices in gold. The opinion is based on the belief that higher interest rates make other assets, such as bonds, more attractive than holding a non-interest-bearing asset like gold.

However, this is not always the case. You need to take into account the global market sentiment when analyzing the relationship between gold and interest rates. For example, when higher interest rates are introduced as a weapon to battle rising inflation rates, gold can still climb if markets don’t have faith in the new monetary policy.

The US dollar

Since gold is denominated and traded in US dollars, a stronger US dollar usually leads to a fall in the price of gold, and vice-versa. A weaker dollar can also make other foreign currencies relatively more valuable, which in turn can increase demand for gold.

The following chart shows the complicated relationship between the US dollar index (a currency index against a basket of other major currencies, orange on the chart) and the spot price of gold. Notice how, most of the time, the two charts move in the opposite direction.

Financial stress and political insecurity

Since gold acts as a safe-haven asset in times of market instability, financial stress, and political insecurity, investors tend to invest their funds into gold during those times. This in turn causes the price of gold to rise.

How does gold perform during global market instability?

Gold is an asset that is scarce and difficult to mine, which limits its supply. When the supply of an asset is limited, the asset usually has an inherent value attached to it. In the case of gold, the metal has been used for thousands of years as a store of value, and investors still pile their cash into gold investments when times get tough. 

A popular indicator of the current risk sentiment in markets is the VIX indicator, which shows the expected volatility of the S&P 500 over the next 30 days. When VIX rises, markets are usually in a risk-off mood, which supports the price of gold.

Another way to assess the current risk sentiment is to follow the performance of riskier assets, such as stocks for example. When stocks fall, investors often move their funds into bonds and precious metals. Popular examples are the Great Financial Crisis of 2008 and the Covid-19 pandemic in early 2020, where in both cases the stock market fell along with rising prices in gold.

Gold trading market hours

Gold trading on the spot market is available 23 hours a day from Sunday through Friday. The market opens at 6 pm on Sunday and closes at 5 pm on Friday, Eastern Time. 

There is also one hour during the day, from 5 pm to 6 pm, when the spot market is closed. In addition, gold also follows market holiday closures and doesn’t trade on those days. A full holiday calendar can be found on the CME Group website.

Ways to trade gold

Gold can be traded in many different ways, including gold CFDs, futures, gold mining stocks, and gold ETFs. Here’s an overview of the most popular ways to trade gold.

Spot gold CFDs

Spot gold CFDs (Contracts for Difference) are arguably the most popular way to speculate on the short-term price of gold. CFDs are derivative contracts that track the price of the underlying asset, without transferring ownership of the asset. 

CFDs are extremely popular as they allow traders to trade on leverage, which is a way to magnify your trading results and profit even on small movements in the price. However, bear in mind that trading on leverage can also increase your losses if your trade goes wrong.

Gold futures

Another way to trade on gold is to use futures contracts. A futures contract is an agreement between a buyer and a seller to transact an asset at a set date in the future. Futures are popular to speculate on future price movements, but they also allow the buyer to take physical delivery of the underlying asset at the set date.

Gold mining stocks

There is also a way to gain indirect exposure to the price of gold – by trading gold mining stocks. These stocks of companies that mine, produce, refine, or distribute gold are often correlated with the price of gold itself. That is, when gold rises, gold-related companies increase their profits and their stock prices rise.

Gold ETFs

Last but not least, if you want to invest passively into gold with a long-term goal, then gold ETFs could be the right choice for you. Exchange-traded funds (ETFs) invest in various gold-related assets and instruments, including physical gold, gold futures, and different gold-mining companies. 

They trade on the stock market just like regular stocks and offer indirect exposure to the price of gold.

How to trade gold

Gold trading has never been more accessible. If you want to get your feet wet with gold trading, here are a few simple steps you need to follow.

1. Open a live trading account. The first step is to open a live trading account with Swift Expert Trades or a broker of your choice. With Swift Expert Trades, opening a live trading account is quick and easy – it takes less than a minute! If you want to practice your trading skills, open a demo account first.
2. Make a deposit. The next step is to fund your trading account. Take into account how much you’re going to trade, what leverage you want to use, and how much you can afford to lose. Leverage allows you to boost your market exposure, so you can start with a small trading account first.
3. Make your analysis. Before opening your first trade, you need to make your analysis and anticipate the future direction of gold. If you think the price will rise, you buy, and if you think the price will fall, you sell.
4. Monitor your trades. This is a crucial step that many traders neglect. Once you have an open trade, you need to monitor it and make adjustments as necessary. If market conditions change, for example, don’t hesitate and close your trade. There will always be new trading opportunities in the gold market.

How to make a strategy for gold trading

Developing a well-round trading strategy is crucial in becoming a successful gold trader. Here are a few points that will help you in creating a successful gold trading strategy by limiting your losses and increasing your profits.

What moves gold

The price of gold moves as the result of changing supply and demand forces. To be more precise, demand for gold can rise during times of market stress, high inflation rates, or increased industrial demand. 

Conversely, supply can rise with additional gold added to the market (e.g. central banks selling some of their reserves) or positive risk appetite that forces investors into riskier assets such as stocks. There can also be other reasons for increased supply, but it’s important to note that higher supply usually means falling prices.

Understand the crowd

Supply and demand are determined by the opinions and reactions of all market participants. For example, gold-mining companies could be trading gold to hedge against lower prices, while large speculators could be buying gold because of an upcoming economic recession.

Using the Commitment of Traders report, which is released each Friday on the CFTC website, can give a useful overview of how different market participants changed their positions compared to the prior week.

Read the long-term chart

Charts offer an excellent way to read the emotions of different market participants. If you use the 15-minutes chart for trading, you should check the longer-term chart and assess the bigger picture of the market. When the trend on the short-term chart aligns with the trend of the long-term chart, this is often when the best opportunities form.

Develop a strategy

Without a strategy that acts as a roadmap for your trading decisions, you’ll likely fall into the trap of emotional trading.

A good trading strategy for gold trading should include the following points: 

• Entry rules: When are you going to open a new trade? What is the trigger for a trade? Here, you can combine technical and fundamental analysis.
• Exit rules: When are you going to close your trade? Using take-profit and stop-loss orders is always useful, but you can also create rules for closing your trades manually.
• Position size: How are you going to calculate your position size? As a rule of thumb, don’t risk more than 2% of your trading account size on any single trade.
• Other relevant tools: How are you going to analyze the market? How long will you keep your trades open? Will you hold your trades over the weekend? You can specify any additional fields that you consider helpful in your trading.

Advanced technical analysis for gold

Technical analysis is an analytical discipline that involves reading and analyzing the price chart to predict where the price might be heading. Technical analysis is based on the premise that history repeats itself, that markets like to trend, and that the price is discounting all available fundamental information.

Classic method

The classic method of technical analysis would involve reading the chart for bullish or bearish chart patterns and determining the overall trend of the market. 

Chart patterns like the head and shoulders, the inverse head and shoulders, triangles, wedges, rectangles, double tops and bottoms can all be used in the classic method of technical analysis.

Trend-followers could analyze whether the market forms fresh higher highs and higher lows (this would be an uptrend), or fresh lower lows and lower highs (this would be a downtrend). The best opportunities arise when trading with the trend, not against it.

Advanced method

Traders who are more experienced with technical analysis can also use advanced charting tools. Measuring the strength of a trend, its projections and corrections, as well as overlaying charts of correlated assets over the chart of gold are advanced methods that can help you make better trading decisions.

The projections of a trend are measured by how much a new impulsive wave travels above the previous high, while corrections are measured by how strong corrective waves are. This is best described with a chart.

Tips for gold trading

Gold trading can be risky if you’re trading without a trading strategy and risk management rules. Here are a few tips that will help you get the most out of your gold trading.

• Create a trading plan: A trading plan acts as a roadmap for your trading. A well-round trading plan should at least include the following: your entry and exit rules, trading hours, holding periods of trades, stop-loss and take-profit rules, and other points that you find important for your trading.
• Illiquid market hours: You shouldn’t trade immediately after the market opens or before the market closes. During those times the liquidity of the market drops, and you might not get the best prices for your trades.
• Follow correlated markets: The get the most out of your gold trading, should always keep an eye open on correlated markets. The US dollar, the Australian dollar, gold stocks, and interest rates can all provide valuable clues for the future direction of the gold price.
• Assess the risk sentiment: Since gold acts as a safe-haven, understanding the current risk sentiment in the markets is quite important when trading gold. Take a look at how risky assets, such as equities, perform before you place your gold trade.
• Always use stop-losses: Your strategy should include stop-losses as a mandatory part of trading. Stop-losses prevent large losses in times of high volatility in the markets or when unexpected news is released.

Why trade gold with Swift Expert Trades

Swift Expert Trades is a regulated online CFD broker that offers excellent conditions to gold traders. Competitive spreads help you to receive more of your profits, and the provided leverage allows you to boost your gold market exposure and trading performance.

Swift Expert Trades’s award-winning trading platform offers a wide range of tools that cater to both beginners are experienced traders. The platform is easy to use and has a fully customizable user interface, which allows you to focus on what really matters: the price chart and trading.

Besides gold trading, Swift Expert Trades offers trading on a variety of asset classes, including forex, cryptocurrencies, commodities, and stock indices. This allows gold traders to also follow correlated markets and identify the best trading opportunities in the gold market.

Open free account

Opening a live trading account with Swift Expert Trades is quick and hassle-free. It takes less than a minute to complete our registration form, and you can place your first gold trade as soon as your account gets approved.