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What is gold trading?
Gold trading is the practice of speculating on the price of gold markets in order to make a profit – usually via futures, options, spot prices, or shares and exchange-traded funds (ETFs). Usually, physical gold bars or coins are not handled during the transaction; instead, it is settled in cash.
Gold is a valuable and in-demand asset that is easy to sell, but limited in supply. It is widely recognized as a popular commodity and a secure investment for traders.
In this blog post, we will discuss how to trade gold in forex, what moves gold prices, and how to invest and trade in gold
The Value of Gold
Gold is used for jewelry, stores of value, and even in industries like medicine, electronics, and car making.
Gold is a rare commodity and it is indestructible, hence appeals to people from the low class to the high class in society.
The origins of gold trading can be traced back to ancient civilizations, where it was utilized as a symbol of wealth and power and a form of currency. The ancient Egyptians mined gold to create ornamental pieces and jewelry, as well as using it as a means of exchange. Similarly, in ancient Rome, gold coins were minted and used as legal tender, with the Roman Empire being renowned for its substantial gold trade.
How to trade Gold in Forex?
Gold is traded in two primary ways: over-the-counter (OTC) and on exchanges. The global center for OTC trading is London, where market participants trade directly with each other. Although this market is less regulated and more flexible, the counterparty risk is higher.
On the other hand, exchanges are regulated platforms with centralized trading. They usually offer standardized contracts, which may limit the flexibility of certain traders.
Besides London, the other major gold trading centers are New York City and Shanghai. NYC has the COMEX exchange, while Shanghai has the Shanghai Gold Exchange.
What moves gold prices?
If you’re interested in trading gold, it’s important to understand what affects its price. This way, you can make smart trading decisions and avoid any potential losses.
Depending on the current mood of the financial markets, the drivers of gold prices can vary. Here are some key factors to keep in mind.
Inflation & High-Interest Rates
High inflation inversely affects the price of gold to the upside since investor sees gold as a store of value.
One important factor that can impact the price of gold is the decisions made by central banks like the US Federal Reserve (FED), European Central Bank (ECB), and Bank of England (BoE). Specifically, when these banks make choices about interest rates in order to manage inflation, this can have an effect on the price of gold.
US dollar value
The price of gold is linked to the value of the US dollar. Generally, when the US dollar goes up in value compared to other currencies, the price of gold goes down.
This is because buyers who use non-US dollar currencies find gold more expensive and demand decreases. Conversely, when the US dollar loses value, gold becomes cheaper for overseas buyers, and demand increases.
Whenever there is a geopolitical development, especially involving economic powers, the price of gold tends to rise as people consider diverting cash into a safer haven.
Investing in gold ETFs or trading gold CFDs and futures has gained popularity, however, physical gold continues to be utilized in the creation of jewelry and investment options such as coins and bars. The demand for these products will also have an impact on the price of gold.
Pros and Cons of Trading Gold in Forex
- Gold is a good hedge against inflation. Whenever the stock market is not doing well and cash is losing its value, gold becomes an alternative asset for investors
- The value of gold over long-term is often stable, hence is a stable investment
- Gold is considered to be liquid, it can easily be converted to cash anytime. There are always ready buyers and sellers in the market.
- If you are looking to diversify your assets, gold is considered a great tool.
- Holding gold does not produce any yield, unlike stocks where you get dividends.
- CFD gold trading is volatile, hence traders can lose their capital during the volatility period.
What are the best gold trading strategies?
This is when a trader opens a trade with a smaller lot size and keeps this trade open for a long period. It can be a long or short position. The overall result will be to make a profit.
When a trade takes a short-term position to speculate on gold price movements during major economic events such as interest rate releases, CPI news, unemployment news, etc..
Most traders position themselves to look for patterns in the movement of gold prices to identify strong trends. This is done using technical analysis to identify and confirm price trends. Whenever there is an upward trend, a trade opens a buy position and when there is a downward trend, a trade opens a sell position.
This trading strategy is when a trader opens a position during intraday gold price fluctuations. Since gold is a highly liquid asset, it is highly recommended to trade using the day trading strategy. Any open trades are closed at the end of the day either in profit or loss.
Price action trading
This is similar to trend trading, however, traders look at the recent price movement to decide when to enter or exit a position. Unlike trend trading, traders do not need a long historical chart but focus on recent support and resistance.
How to trade gold CFDs?
- Signup for a live trading account
- Choose which underlying gold product you want to trade
- Use any of the strategies above to identify trading opportunities
- Open your first position
- Monitor your trade using technical and fundamental analysis
- Close your position based on your trading strategy
When is the best time to trade gold?
The best time depends on your goals and strategy. However, the ideal time to trade is generally when the US and other Western markets are open. Gold is valued in dollars and in the past, it was linked to the USD, causing a strong correlation between the two. As a result, when US markets are open, USD tends to be more volatile, which increases the likelihood of gold’s price moving during this time.
What is the symbol for gold?
The symbol for gold depends on your broker, the 2 symbols often used are XAUUSD or GOLD
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