- Is the gold trade risky?
- How do you trade in gold?
- Is trading gold profitable?
Many market participants widely trade gold because it is among the volatile commodities in the forex market. Gold is probably the most traded commodity in the world after oil, natural gas, and coffee.
As to metals, gold is the king. You can trade gold by using both technical and fundamental analysis. We already have some articles if you like trading with indicators, price action, or robo-advisor. If you want to know how to trade gold using fundamentals, follow this article.
Let’s dive into the main piece on how you can master the fundamental strategy to trade gold before you miss any excellent opportunity and fundamental news.
Brief about gold
Physical gold has been in existence since 2000 BC after the Egyptians started mining metals. Talking about the current global supply, it is over 189,000 tonnes.
XAU is the internationally accepted symbol for GOLD. XAU/USD in terms is the trading symbol of gold against the US dollar. Gold is very similar to all the other currency pairs, and here it is traded just like any other asset in forex.
When you know briefly about gold, you might also want to know how and what affects its rate. Gold prices constantly keep changing, and many factors are behind it.
What affects the gold rate on the exchange?
The gold market works primarily according to its industrial supply and demand in the global market. Unlike any other currency, it can’t dramatically increase or decrease when the government prints more paper currency.
Gold is one of the broadest (in terms of the influence of various factors) investment and speculative instruments. Many factors can simultaneously influence the price during trading — supply/demand, world news and news from central banks of countries, natural disasters, and currency movements.
Now you can imagine the volatility and risk involved in trading gold when so many factors affect it. A small event can cause a significant movement in this commodity, so gold is also a risky asset to trade.
Risks of trading gold
Trading in gold instruments carries the usual speculative and investment risks. Although metal is considered one of the methods of long-term investments in any form — products, OMC, exchange instruments — it also knows how to draw long-term bearish trends.
Short-term or medium-term trade in gold is somewhat risky because of its high volatility, but at the same time, it also gives an excellent opportunity to make money. Risk, profit, and loss largely depend on your trading analysis, style, and techniques. You can use either technical or fundamental analysis for trading gold.
Let’s look at the chart. The historical data for spot gold XAU/USD shows a significant spike, with the price pushing out to 850 in January 1980. A 20-year bearish trend followed this until September 1999. Only then did the gold price reverse. At first, it was a rebound — after which the exchange value declined again throughout 2000. Quotes confidently entered the bullish trend only since April 2001.
What is fundamental analysis?
It is a method of breaking down a country’s economic, political, and social consequences and currency. In simpler terms, fundamental analysis is a trading technique wherein traders use news events to trade the market in simpler terms.
By identifying the primary drivers of a currency’s intrinsic value, forex participants can craft informed trading decisions. One of the ways to trade gold using fundamentals is by correlation, where traders can initially use such currencies or assets that are somehow related to gold.
What is currency correlation?
The general definition of correlation is how one thing behaves similarly to the other. Likewise, currency correlation is a gauge of how one currency pair is correlated in value and will move synchronically or counter in the FX market.
It is also a trading technique wherein traders analyze one currency pair and take the same trade on another, closely correlated, and opposite trade in negatively correlated pairs.
If two currency pairs are positively correlated, they both will go up or down in price similarly. At the same time, if one currency is negatively correlated with the other, then one will appreciate and the other depreciate.
Examples of positive and negative correlations are:
- Positive correlation: AUD/USD and EUR/USD
- Negative correlation: EUR/GBP and GBP/USD
Trading gold using fundamentals correlation
When you talk about currency correlation with gold, AUD/USD should be the first pair that should strike in your mind. AUD/USD and gold are highly positively correlated with each other.
This means that if the AUD/USD moves up, the gold moves up and vice-versa. Being positively correlated, you will find them moving in the same direction most of the time, and only the difference is the volatility.
These assets move in the same direction because they both have USD associated at the back. That being said, you can make out that if the USD is gaining at a price, both the market gold and AUD/USD will move down, while if the USD is losing in price, both the gold and AUD/USD will go up.
AUD/USD stands for price quotation of Aussie dollars concerning the US dollar. On the other hand, gold is USD per oz. If we talk about gold mining, Australia is highly related to it. Gold mining in Western Australia is the third-largest commodity sector. This makes AUD more inclined toward gold.
When the gold prices vary, it directly affects the amount bought and sold in AUD; this changes the supply and demand of AUD/USD in the global market. As you can see, both the XAU and AUD have USD as a quote currency, which directly means these assets are affected by the rise and fall of USD prices.
Trading the gold with USD correlations
XAU/USD is paired with USD; that being said, it is highly affected by any impact on USD.
USD and XAU are negatively correlated, meaning the prices of gold will go down if the USD rises in price and vice-versa, in terms makes it a good choice for us to choose it to make our strategy.
Let us learn and trade gold strategy with USD correlation. Many news events have an aggressive effect on USD; a few of them are the NFP on the first Friday of every month, unemployment rate, initial jobless claims, GDP growth rate, and CPI.
Non-farm payroll
We will use an example of a recent NFP report and how it affected the XAU/USD pair.
The news that is released creates significant volatility in the FX market, particularly the USD pairs. And if the number is better than the expectation, the US dollar becomes bullish. However, if the number is worse than expected, the US dollar is bearish.
To trade the NFP, you need to close all the running trades to make sure you are not on the wrong side of the market.
Scalping strategy example
- Move to the lower time frame, say 15min, and wait for 12:30 pm GMT.
- Do not enter the trade immediately once you see them move in a specific direction and wait for the entire candle to close.
- Check the volume in the volume indicator.
- Once the candle is closed, if it is a bearish candle, take a sell position and if it is a bullish candle, take a buy position.
- Place your stop loss by looking into a 5 min chart at 5-6 pips away from the previous candle.
- Take profit when you are happy with your scalping trade at 1:2 R: R.
Day trading strategy example
- Move to the 30min time frame and wait for the market to go in range.
- Wait for the breakout, and once you have it take the trade in the direction of the breakout.
- Place your stop loss at 4-5 pips away from the low or high in case of sell/buy position.
- The take profit will be 1:2 R: R.
In the below 30min time frame, you can see the price breaking the range. Once the range is broken, you can take the trade after the previous candle is closed.
The NFP data was released on 6 August 2021, and the reading was 943,000. This number lags by one month; therefore, it means in July, 943,000 new jobs were added to the US labor market.
Final thoughts
Trading gold is highly risky, primarily when it is traded with news such as NFP. There is a high risk of losing your capital, so it is better to close the trade when you make a wrong trade entry.
According to many investors, gold and silver are assets that keep their money safe from inflation. The government has full authority to print money, and when they print it too much, there is more supply of it in the economy, making it of less value in the market. Gold can be a good investment in these situations.