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Trading Gold in 2023

Trading Gold in 2023

2023-01-17 • Updated

Information is not investment advice

Gold trading is one of the oldest investment vehicles in the world. The precious metal plays an important role in the global economy. This metal is valued far beyond its industrial uses, as gold deposits are rare and difficult to find. In Forex trading, gold is one of the most popular asset to trade.

Why do traders prefer gold? There are many reasons for that. In this article, we’ll discuss the reasons for choosing gold as a trading asset, what moves gold prices, and how to trade gold via CFD.

What is gold trading?

Gold trading refers to the buying and selling of gold in order to profit from price movements. Because gold price is considered to be highly volatile, traders try to make market profits by buying the commodity when the price is low and selling when it is high, or going short the precious metal when prices are expected to fall.

Gold trading requires careful consideration due to large price fluctuations and the wide range of instruments available, from gold derivatives such as futures and contracts for differences (CFDs) to gold mining stocks.

Before you start trading gold, you should be aware that the market can be extremely volatile, resulting in a high degree of risk. The chances of making a profit when trading gold go hand in hand with the risk of loss.

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Gold, monthly chart since 1996

What moves gold prices?

Before learning how to trade gold, it’s important to understand what influences the gold price. This information can help you make logical trading decisions and reduce your risk of loss. What drives gold prices may change at different times depending on the prevailing sentiment in the financial markets. Let’s look through them.

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Gold price movers

Central banks policies

Central banks hold fiat money and gold in reserve. As central banks diversify their monetary reserves — from the fiat currencies they have accumulated to gold — the price of gold tends to rise.

Value of US dollar

While the US dollar is no longer pegged to gold, prices of the precious metal and the USD tend to move in the opposite directions. As the US dollar appreciates against other currencies, gold becomes more expensive for non-US dollar buyers and the demand for it falls. On the other hand, the depreciation of the dollar makes gold cheaper for foreign buyers, and demand increases.

Supply and demand

Gold prices can be influenced by simple supply and demand; as demand for consumer goods such as jewelry and electronics increases, the value of gold may rise. In fact, India, China and the US are major consumers of gold for jewelry in volume terms.

Investors were always into gold, and over the past 50 years, the price of this metal has risen substantially. In total, gold purchases from various investment instruments in 2019 amounted to 1,271.7 tons, representing more than 29% of total gold demand.

Market volatility

In times of economic uncertainty, such as an economic downturn or political instability, more people are turning to invest in gold because of its enduring value. Gold is often considered a safe haven for investors during turbulent times.

Gold production

Gold supplies are mainly driven by mining, which has stabilized since 2016. World gold production affects the price of gold, which is another example of supply matching demand. Moreover, getting less gold costs more. The gold mining industry is suffering from rising costs in all areas. While some of these costs have declined over the past few years due to falling oil prices, they are likely to increase in the future as ore quality continues to decline. In addition, as global oil production begins to decline in the future, gold production will be negatively impacted, even with much higher gold prices. This increases the cost of extracting gold, sometimes leading to higher gold prices.

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Gold reaction to the world’s events.

Advantages of gold trading

There are certain reasons why traders prefer gold for trading. And here are the reasons why.

  • Gold has historically been a good hedge against inflation. Inflation is the number 1 enemy of investors because it reduces the purchasing power of money. In times of turbulence, when the stock market is in trouble and cash is losing value due to low interest rates, gold can be an attractive asset.
  • Although the price of gold fluctuates and sometimes experiences high volatility, the metal retains its value over the long term and is therefore viewed as a stable investment.
  • Gold is highly liquid, which means that buyers can easily find sellers in the market, and vice versa. This is important because it reduces transaction costs and reassures traders and investors. Even the market for physical gold is liquid, as finding a buyer is not difficult.
  • Gold is a great diversification tool. It can outperform the stock market in certain periods, for example, a period with a broad risk appetite.

Disadvantages of gold trading

Of course, there’s no perfect asset, and gold has its disadvantages as well.

  • If traders hold physical gold, storing it can be difficult and expensive, depending on how much gold they have. Safe deposit boxes and vaults aren’t cheap.
  • Gold doesn’t provide any interest income. If traders own certain shares, they can pay dividends to them. If they keep cash in their bank, they can earn interest on it. Meanwhile, they don’t receive any interest income from gold.
  • Returns can be low during “risk” periods as investors flock to riskier assets.

What is a gold trading strategy?

Before you start trading the yellow metal, it’s important to clearly define your strategy. There are different gold trading strategies that can help you determine when to enter and exit a trade and how to manage a position while it’s open rather than basing decisions on pure speculation. A trading strategy designed for another asset, such as a stock or a currency pair, may not work the same for gold. Here are some of the most popular technics.

Position trading

The trader keeps a trading position open for weeks and months to benefit from the movement in the price of gold over an extended period.

News trading

A short-term gold trading strategy based on news such as central bank policy statements or economic data.

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On December 13, 2022, the US Inflation Rate was lower than expected, 7.1% vs.7.3% expected. That result led to the USD drop, and gold, which reversely correlated with USD, vice versa, gained 4183 bp.

Trend trading

Traders look for patterns in the movement of the gold price in order to identify strong trends. When the price is in an uptrend, a trader expects further rise and opens a buy trade. When gold is in a downtrend, the price may continue falling, so a trader opens a sell order.

Traders often use technical analysis to identify and confirm price trends. Technical indicators can help them determine a potential change in an uptrend or a downtrend so that traders may adjust their position accordingly. Trend following can also be part of a gold CFD trading strategy.

Day trading

Day traders hold a position open for one trading session, acting on intraday fluctuations in the price of gold. Since gold is a highly liquid asset with small spreads between the bid and ask price, it is well suited for intraday trading. Day traders can use news events to focus on buying or selling gold during a specific time of the day.

Price action trading

A price action strategy is a gold trading system in which traders look at price action to decide at which level to open or close a position. Unlike strategies based on technical indicators, traders focus on Japanese candlestick patterns and chart patterns to make their decisions.

Trading gold with FBS

FBS gives you an opportunity to profit on gold. You will find gold under the symbol of XAUUSD in FBS Trader App and MetaTrader 4 or 5. Look up contract specifications for trading gold at FBS website.

Bottom line

The gold trade has ingrained itself quite well over the years. Considering trading it for beginners can be a great start. Try gold trading with FBS! We can help you to execute your trades comfortably.

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