Features of trading gold assets

Do you want money? Buy gold! … or sell

Gold in any form - physical, paper, jewelry, and even virtual - has historically been considered a financial (and political!) safe-haven asset, the protection against inflation, and a guarantee of stability. Even a minimal hint of any problems is enough for investors to leave any other assets en masse, and invest in gold deals, saving their capital.

Until financiers have come up with a more stable monetary system than tied to gold, and sovereign currencies based on blockchain have not yet conquered the world, we should also join a team of successful speculators, so let's get started.

Currency history and basic parameters

Let’s omit the ancient history of the precious metal. Before the abolition of the gold standard in 1971, the real value of any money was determined not by the face value written on banknotes, but by the weight of gold, which could be obtained in return for the “paper pulp”.

At that time, Europe was suffocating under the mass of cash dollars that it received as loans for post-war reconstruction under the “Marshall Plan”. The European business was ready to repay the United States those loans for any price as well as return trustless American money, demanding a real precious metal instead.

The consequences of the Jamaican G7 leaders meeting, at which it was decided to evaluate all currencies through the US dollar, are visible on the illustration below. Since 1978, the US Federal Reserve has sharply reduced the level of guarantee coverage of its currency with gold and continued to fill the world with an “empty” mass of dollars.

The “Gold price” of the dollar

Gold and the dollar: then and now

The central banks of leading countries continue to accumulate strategic gold reserves to support and stabilize the economy.

Transactions for the manipulation of gold are usually made on the OTC market and actively influence the market rate. During periods of any financial risk, gold reserves are traded on international exchanges to increase the supply of foreign currency in the country, usually USD and EUR.

Fundamental analysis or why the volume does not go into the price

Gold assets are never traded without a preliminary assessment of the fundamental situation.

External factors that are monitored mandatory:

  • dollar exchange rate - the higher it is, the cheaper the gold;
  • energy prices - the more expensive, the more gold grows;
  • crises, wars (including trade wars), political, economic and natural disasters;
  • the macroeconomic situation in the main regions: USA, Europe, China, Japan;
  • stock market dynamics.

For the market, gold is, first of all, a currency, not a commodity; therefore, the physical volume of production does not affect its speculative price.

Modern industry consumes gold in insignificant amounts. For the past 20 years, bull market fans have been actively speculating on the technological problems of the “gold” production growth. Still, in reality, the annual production volume is so small compared to the already accumulated reserves that the market does not notice it.

Export-import of Gold in the world

Gold: export-import

Most of the gold mined (in a documentary form) is immediately available for market operations. It means that the entire world stock of gold is a potential source of supply. Of the 171.5 thousand tons mined in the history of humanity (according to experts of Thomson Reuters GFMS) today, approximately 42% are in monetary and investment reserves.

It’s important to understand that almost all “new” mined gold is not consumed, but added to the vaults: private, banking, state - Central banks, IMF, bullion and coins, ETF funds, jewellery.

Gold: volume and distribution

Gold: resources, volatility, seasonality

The “new” dollars have a more significant influence on the price of gold: if the increase in gold reserves is 2% per year, then the dollar mass is growing at a rate of more than 5%. The dynamics of investment demand of 0.25% causes ten times more volatility than a 10% change in production.

By the way, since 2009, China has not disclosed the volume of gold reserves, although it continually buys and accumulates gold in various assets. It provokes fears of market manipulation: China can make the yuan stronger than the dollar at any time by merely raising the price of gold.

In the long run, the price of gold assets is determined by the stability of the monetary system and the economy, as well as the policy of devaluation of national currencies pursued by federal regulators.

Confidence in paper currency falls when the gold that “secures” this currency is sold and declines especially strongly during a period when the currency is weakened for other reasons.

Trading on the news

The US and Europe data have a strong influence on the gold exchange rate - GDP, unemployment, inflation, as well as interest rates of the Fed and the ECB, but it is complicated to predict this movement. Even the failed statistics of the USA or the Eurozone may not be a serious movement. Still, the fall of the morning Asian market (especially China) always causes a similarly strong reaction of spot assets of gold at the European Forex session.

News work with the gold makes sense only for situations with an obvious outcome - positive or negative, for example, some kind of natural force majeure - then gold becomes speculative, but growing standardly, and you can manage to jump into quick purchases.

However, for beginners who do not have work experience and a decent deposit, gold trading is strongly discouraged before the publication of statistics, currency and stock reports, speeches by financial figures and world summits.

Features of technical analysis

All gold assets are considered stably volatile, but short-term speculators in the “gold market” can only be held with multi-million dollar deposits, so we focus at least on medium-term transactions.

Current correlation and XAU volatility

XAU: correlation, volatility, derivatives

As you understand, we do not trade in gold bars or coins, although such assets exist.

Let’s take a closer look.

The precious and most “emotional” metal is available to the ordinary trader in the form of an ordinary CFD asset, commodity futures, indices, ETFs, securities. The classic spot asset of gold by ISO 4217 has the code XAU (XAU/USD, XAU/EUR), which means the rate of one troy ounce of gold (28.5 g).

The minimum trading lot is 100 ounces, or $130-150 thousands, but due to leverage, the volume of real investments can be reduced: for 1:100 it is required $1,500, for 1:500 - only $300.

Most often, a small trader has no choice - he is forced to trade what the broker offers.

If instead of this currency or traditional exchange ticket (CG, GOLD) you are offered any other “branded” options, then such quotes should be carefully checked for correctness. Compare the quotes of your broker with the data stream, for example, from Reuters - if there is a stable difference, it will have to be taken into account in the trade.

We remind you: with high (and potentially profitable) volatility, all gold trading assets have a high spread.

The OTC market is positioned as a round-the-clock market, but be sure to pay attention to the time of trading with your broker in gold, for example, for some, Friday “on gold” closes 1-2 hours earlier than currencies.

You can be late with closing deals at the end of the week.

London fixing LBMA sets a benchmark for market participants twice a day - this price is used for the metal supply contracts and is of the reference value for Forex. But still, it is precisely the period 10:30-15:00 in London that is considered the most liquid for gold transactions.

Correlation and cross-rates

It is traditionally believed that XAU/USD has a stable relationship with some currency assets (AUD/USD, USD/CAD, USD/CHF), as well as the dollar index, but, it is necessary to check the relevance of the correlation regularly. For example, the popular idea of using EUR/USD as a leading indicator for gold is no longer relevant.

If we talk about the mid-market correlation, then in case the main dollar pairs are in a wide flat (the market does not have a stable direction) —investors actively "run into gold", which makes the last to rise in price when it paired with the dollar.

Mutual correlation USDX and XAU/USD

USDX-XAU/USD: correlation analysis

The influence of oil prices on gold (on WTI - stronger, on Brent - weaker) is manifested in the form of trading signals only if there are no other significant fundamental factors during the day.

From the foundation point of view, XAU/USD stably maintains a robust positive correlation only with the Australian dollar (AUD/USD). Australia is the world leader in the extraction of gold-bearing raw materials, and to acquire it, central banks need to buy the Australian dollar.

RBA constantly has to balance its gold and foreign exchange reserves, so the volatility in the gold market increases at times when statistics are published on the Aussie, or other fundamental events occur.

AUD: Correlation analysis with Gold

Spot Gold and XAU/USD

By controlling the gold exchange rate fans of extreme trading can try to trade EUR/AUD or GBP/AUD crosses in strong traffic, but, of course, at periods no lower than H1 and with fairly reliable stops.

Features of trading strategies

We warn you right away: modern technical analysis does not offer any super indicators for gold (both spot asset and futures), unless you are a high-frequency HFT trader.

Most often, complex standard methods that take into account trading volumes are used for analysis. After the crisis of 2007-2011, there was a complete change in the dynamics of volatility, after which gold became one of the most speculative assets and almost all previous strategies had to be cancelled.

Gold: global trend reversal

Trend spread XAU/USD

A more or less clear direction for gold can be seen on H4-D1, but so far there are no fundamental reasons for a strong direct trend, all trading methods in a wide flat will be relevant - Klondike for medium-term speculators.

The optimal time for trading gold within the day is considered the second half of the European and American sessions.

We remind you: the average daily volatility range is wide, so Stop Loss for XAU/USD should be quite large, and the ATR indicator will show these price zones best of all.

We offer several popular options.

«American Explosion»

The standard strategy for the breakdown of the range on H1. Pending Buy Stop/Sell Stop orders are placed outside the scope of 14.00-15.00 (Moscow time), Stop Loss is set at the level of the opposite order, and the minimum Take Profit is chosen equal to the size of the range. After the breakdown, transactions are held until 20.00-21.00 (Moscow time); if up to this point neither Take Profit nor Stop Loss has worked - orders are deleted.

XAU/USD: Breakthrough Trading Situations

XAU/USD: Breakdown strategy chart

Golden Strategy: EMA+MACD+MFI

Intraday gold trading volumes are formed by central and commercial banks, investment funds, industrial groups and other large participants.

High requirements for deposits (even on Forex) and, as a rule, small leverage lead to the fact that in the mass of transactions in gold, there are practically no small players. Hence, the price is rather accurately modelled by the movement of volume, including tick.

You will need indicators: EMA (14), MFI and MACD with standard settings for TF not lower than H1 (see Using Indicators).

EMA+MACD+MFI: strategy on tick volumes

EMA+MACD+MFI Strategy Signals

On the volume indicator, groups of green lines should be formed that signal a possible change in direction. We open orders from the market when the price crosses a moving average, but pending orders can also be used. We set the stops for the line average of the last reverse max/min.

Strategy DrakeDelayStochastic

A set of indicators for this technique can be freely found on the network:

  • HolyCandleTime and HolyChannel - control the trend and channel of volatility;
  • HolySignal - forms a signal point (and a sound signal);
  • DrakeDelayStochastic - oscillator to confirm the entry point;
  • Timeframe: not lower than H1 (see Using Graphic Tools).
DrakeDelayStochastic: an example of a medium-term technique

DrakeDelayStochastic Strategy Signals

We enter the market when signal points appear in the areas of the HolyChannel indicator, and DrakeDelayStochastic is located outside the overbought/oversold zone. Stop Loss/Take Profit - beyond the borders of the red channel.

A few practical notes

Gold remains the same argument of power, as many centuries ago. All gold assets are speculatively responding to political and economic factors, natural disasters, terrorist attacks, crises, and manipulations by central banks.

Crisis phenomena in geopolitics and economics, especially in regions associated with the extraction or transportation of gold, lead to the fact that investors begin to move money into gold, thereby increasing demand and increasing prices. It is gold along with oil that is the most profitable, but at the same time, the most dangerous asset for both speculation and investment.

Try It Yourself

As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.

The testing of this currency feature was arranged in Forex Tester with the historical data that comes along with the program.

To check this (or any other) feature’s performance you can for free.

In addition, you will receive 23 years of free historical data (easily downloadable straight from the software).

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