Every industry has its own success and failure stories, but there is one thing that every trader knows: when the markets are in a bull run, gold is the go-to commodity! Gold is one of the most stable and secure forms of capital, making it a popular alternative investment for investors around the world. The problem is that many people aren't aware about trading gold because it is something that requires specialized knowledge and experience.
Despite its record highs, gold continues to be traded as an alternative to other currencies and asset classes. Aside from trading it for the long-term, you can also use it to day trade and get some regular income since it is quite volatile. In this article, we will discuss the best strategies for trading gold, the risks involved in trading gold, relevant indicators and strategies of gold trading.
Why Trade Gold?
Gold has been one of the most popular assets for traders, investors and novice investors for generations. The reason for this is because it has one of the highest returns on equity (ROE) among other assets such as stocks and bonds.
In addition to its high ROE, gold also has a negative correlation with most other financial assets. This means that when stocks go up, gold tends to go down. And vice versa when stocks go down, gold tends to go up. It is safe to say that the precious yellow metal is the safest haven for investors looking to diversify their portfolios and add a commodity that can hedge against both inflation and deflation.
So, why should you trade gold in 2022? We’ll give you five reasons why;
- Gold has historically been a sound investment during periods of economic uncertainty due to its liquidity and scarcity factor compared to fiat currencies (i.e., US dollars). When the dollar crumbled in 2008, many turned to gold for its stability thereby propelling it to the $1,000-per-ounce mark. The same also happened during the coronavirus pandemic where investors rushed to invest in gold, making it soar to record prices.
- Gold is a hedge against both inflation and deflation. What does this mean? Whether the cost of living rises (inflation) or falls (deflation), gold prices have been known to go up regardless. During such times of economic limbo, more people are inclined to store wealth through this decorative metal. If you would like to preserve the value of your money, then you can always invest it in gold instead of saving your funds in a bank account.
- Trade gold in 2022 to diversify your portfolio. An expert will tell you that the “perfect” portfolio is one that is cost efficient: While this may be true, the most important requirement for an ideal portfolio is diversification! Having a portfolio with a diverse set of investments that do not directly correlate to each other will help you minimize the collective risk.
Gold has a record counteractive effect to stocks and other financial assets making it the perfect add-on for when you need to diversify your portfolio.
- Gold is considered a “port in the storm” in financial markets by many, if not all, people around the world. It serves as an alternative store of value or asset during times when fiat currency loses its purchasing value relative to other assets (i.e., oil). At the start of the first world war, participating countries opted for the financial gold standard in order to finance the war at the expense of their currencies. This is just but one of the many instances where gold has been used as an alternative for fiat currency.
- Gold is an attractive asset due to its natural beauty, intrinsic value and rarity factor relative to fiat currencies such as U.S. dollars and other major currencies that governments can create out of thin air. And even though there are a few precious metals that are currently priced higher –palladium in particular, gold remains to be the most desired precious metal. This is the best asset class to invest in during times of uncertainty.
The price of gold tends to increase during periods of uncertainty due to the negative correlation between gold and other commodities (i.e., when the value of the dollar falls, the value of gold rises). When the prices of gold hit the $2,000-per-ounce mark for the first time, it was in 2020 during the global pandemic. Coincidence? Don’t think so.
Even though gold has a reputation for being very volatile, it has always maintained its value in the long run. The metal of gods, as it was first popularly referred to, is not an easy one to trade, but it’s important to remember that in the long run, you are most likely to see returns on your investment.
What Factors affect the Price of Gold?
Now, statistics show that gold prices tend to rise during ‘bad times’, but this does not simply translate to buying and hoarding when the said times arrive. There are several pointers that factor in the rising and falling of gold prices. They include;
Market volatility
The price of gold can also be influenced by fluctuations in markets such as equity markets and bond yields (interest rates). When these markets are experiencing periods of strong volatility, investors may move their funds into gold as a safe haven asset. This can lead to increased demand for gold in the market and an increase in its price.
Investor confidence
When investors are confident, they buy gold because they believe it will continue to rise in value. As financial markets experience periods of uncertainty or volatility, there is often an increase in the number of investors looking to sell their gold holdings. This can lead to a decrease in the price of gold when it goes into oversupply due to increased supply from buyers reducing their exposure to rising prices.
Rate of inflation
Changes in the rate of inflation also affect the price of gold. If the rate of inflation increases, then the purchasing power of consumers’ cash decreases and they may be more likely to invest their money in gold as an alternative asset class.
This means that many more people will look to buy gold during times of inflation, which might push its price up. However, the price of gold may also reduce in times of low inflation as people look for other attractive asset classes that can get higher profits.
Government reserves
The price of gold is greatly influenced by central bank reserves of countries across the globe. Activity in these reserves directly impact gold patterns in that the yellow metal is the primary asset for most monetary reserves. When a country seeks to cement its possession of gold by sourcing more of it, away from fiat currency, its price is bound to increase.
As of March 2022, Egypt emerged as the largest gold buyer in the world after purchasing close to 45 tons (44.1 tons to be exact) of the fortune metal. Around the same time, gold prices also hit the $2,000-an-ounce mark. Read between the lines!
Interest rates
Interest rates have a direct effect on the pricing of gold. When interest rates fall, traders will opt to look for a commodity that guarantees good returns, hence the demand for gold will rise. When the interest rates rise, the demand for gold will relatively reduce as people will start selling their gold and invest in other high interest assets at the time.
Currency fluctuations
In financial markets, the value of USD directly correlates to gold. Any fluctuations in the USD will have an inverse effect on the price of gold: A stronger USD will keep the price of gold lower and vice versa. This makes it prudent to keep tabs with the value of different currencies if you are looking to profit from gold trades.
Best Strategies for Trading Gold
It is always a good time to trade gold. The gold market can help you make money, but first you need to know what strategy works best. There are many different strategies that work with gold. But in order to fully capitalize on this, there are certain things you should consider right away.
For starters, you should learn about the various gold products and how they work. You should also stay afloat with the current trends and events happening in the gold market. There are a lot of strategies that traders can apply when investing in gold, but one fact remains undisputed: if you want to make money from the markets, you have to understand what you are doing! Here are some golden trading strategies that will go a long way to help you ace it in the gold markets.
News trading
News trading requires you to understand fundamental analysis before you start trading. With gold, you can use news to trade for short periods. Using this strategy means that you will trade when specific events occur but you only get to hold this position for seconds or even minutes.
It is prudent that you keep up with current affairs or even unforeseen events that my prop up the price of gold. That said, there are also other scheduled events such as economic data, inflation data, Nonfarm payrolls, MPC and central bank meetings, and national holidays among others.
Trading trends
There are also trading strategies that involve identifying the current trends in the market. You can use various theory such as the Elliott Wave theory to find out the direction of a specific trend. This trading strategy is premised on the idea that an asset class will move to the same direction unless impacted by other factors.
If there is an up-trend then the price of gold will be rising higher and you can position yourself to buy some gold. A downtrend means that the price of gold is declining and you can short-sell the market to make some profits. This is a useful trading strategy since gold is quite liquid and moves on either sides from time to time.
Day Trading
Day trading involves making some few trades all through the day in the same way as scalpers. However, scalpers will only open a trade for a few seconds and get their profits. For day trading, you will have to set up some specific times of the day where you can take advantage of gold’s volatility.
You can use the M15 up to the H1 chart to figure out the current trends of the market. With high liquidity and low spreads, gold is a suitable asset class for day trading. You can open a few trades (1 or 2 per day) unlike scalpers that open up to 20 positions in a day.
Price action trading
Using the price action strategy involves making decisions using the price movements of an asset class instead of looking at other technical indicators such as the stochastic oscillator. Gold traders can use various price action strategies such as wave breakouts, reversal or using candlestick patterns.
The good thing with price action strategies is that it can be implemented across different timeframes when trading. If you are a day trader, you can use the M15 chart but swing traders can use the H4 chart.
Copy Trading
Some forex broker such as eToro allow for copy trading, where you can copy the trading skills and actions of an expert forex trader. This works great for newbies who want to get some profits but do not have the right skills yet. Just find some skilled gold trader, and copy their trades.
Relevant Indicators when Trading Gold
Trading gold is not an easy task, but it can be profitable. You have to remember that gold is a financial instrument; you need to learn when and where to trade it as well as how to avoid its risks. Learning to use indicators can help you identify trading opportunities beforehand. Here are some of the best indicators when trading gold.
- Relative strength indicator(RSI)- The relative strength indicator is one of the most popular indicators that traders use. It helps to figure out when an asset class is oversold or overbought. If the RSI indicator drops below 30 then it is likely that gold has been oversold and if it shows 70 then it is overbought. This is a great way to judge the buy or sell signals that you get. Just run up to the indicator and check the numerical value of the RSI at the time. If it is more than 70 then you should not buy gold but you can buy the asset if it is 70 or below.
- Moving averages indicator- A moving average indicator is a simple tool that gold traders can use to gauge the direction of the forex market. You can use the indicator to come up with entry or exit signals.
- Bollinger Bands- This is a group of three lines that show the volatility of this asset class. The Bollinger bands show the history of gold prices over the recent past with the outer lines showing the upper and lower levels of price movement. Be ready for a highly volatile market if the Bollinger bands shrink and little volatility if the strings are expansive.
Choosing the Right Broker for Gold trading
Trading gold isn't just a fine art. It's an investment, and the best investors know that timing is everything. If you are serious about trading gold in 2022, then you need to invest with a highly reputable broker that has developed their system in-house, rather than letting others do it for them.
This is because the best brokers are always looking for ways to improve their trading system, whether it's by adding new features or improving on existing ones. You should also be sure that your broker has a dedicated customer service team and an easy-to-use platform for trading gold. This will help you to make informed decisions about your investments this year and beyond.
To choose your desired avenue for trading gold, it will first depend on the type of gold you wish to trade. You can either trade liquid gold or physical gold. In the case of physical gold (bullion or gold coins), which is the basic form of gold investment, one must have proper documentation and a place for storage. Extra care should also be taken when acquiring the gold to avoid buying impure gold. Pure gold has a purity percentage of 99.9%.
Other important considerations to make when choosing a gold forex broker include decent spreads, regulatory compliance, suitable trading platforms, and ease of deposits or withdrawals among others.
Final thoughts: Trading Gold in 2022
Gold has, for centuries, been a safe haven for investors due to its relatively stable prices. Trading gold (XAUUSD) is a great way to profit from the forex market without actually having to hold the asset. That said, gold is affected by a number of factors that influence the daily price movements of the asset class. With the right trading strategies and a decent forex broker, you can make some profitable trades without having to worry about the risks.
