Everything you need to know about trading gold
Trading gold can be a tricky endeavor, especially for a beginner. In this article we’ll cover the steps that lead to successful gold trading.
Step 1: Understand price movements
It’s no secret that gold doesn’t move the same way as forex pairs, stocks, or other commodities, so the first crucial step is to learn what drives prices. Gold prices are influenced by several economic, psychological, and geopolitical factors.
Inflation and deflation
Gold is one of the safest assets due to its resilience. It’s a proven way to hedge against inflation in times of economic turmoil when cash can quickly decrease in value — so it's only natural that gold prices climb up when inflation is on the rise.
However, during deflationary periods cash becomes more valuable, so gold demand may drop as investors prioritize currencies.
Supply and demand
Gold supply is relatively stable because mining new gold is slow and costly. Hypothetically, a breakthrough or technological advancement in mining could increase supply and lower prices.
Higher demand pushes prices up. For example, countries like India and China drive gold demand for jewelry, and gold is also used in science, engineering and medicine.
Emotions, news and world events
Economic crises and geopolitical tensions make investors turn to gold as a safe haven asset. Greed can also influence gold prices when investors speculate on rising prices, leading to rapid price increases.
Interest rates and other economic data releases may also impact gold. The yellow metal and interest rate have a negative correlation. Similarly, gold is also negatively correlated to USD. When the price of gold goes up, USD goes down, and vice versa. In times of economic crises and uncertainty, however, they can move in the same direction — traders consider both of them to be safe investments.
Why studying historical prices is important
Don’t neglect the study of historical prices — it can give you some valuable insights.
Identify trends: it helps understand gold’s behavior in different economic conditions.
Manage your risks: knowing the details of past volatility helps investors make informed decisions.
Adopt better investment strategies: learn from the past and make better buy vs sell choices in the future.
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Step 2: Choose the right asset type
Gold investment vehicles come in various shapes and sizes, from physical gold (bullion, jewelry) to ETFs, futures and options, each with its own risks, benefits, and market dynamics. Here’s a breakdown of the main gold trading instruments.
Physical gold
Physical gold remains popular on the commodities market. It’s a safe-haven long term investment and can help hedge against inflation and economic crises. Buying physical gold (coins, bullion, jewelry) you are buying a tangible asset: it’s real precious metal, free from counterparty risk.
But note that it has its disadvantages as well. It has low liquidity as it takes time to sell or buy it compared to paper assets, and it requires safekeeping and paying fees if you work with dealers.
Gold ETFs
An exchange-traded fund, or ETF, is a basket of assets that tracks the performance of an index.
With ETFs you can spread the risks across different gold assets and let go of all worries: the fund is managed by a professional. However, the benefits have a flip side: the expenses can be quite high and relying on a fund manager has its own risks.
Gold options and futures
An option gives the right, but not the obligation, to buy or sell gold futures at a set price before expiration.
Gold futures are contracts between a buyer and a seller. Gold is bought or sold at a pre-agreed price in the future.
Many investors choose gold futures and options due to their high liquidity, and access to larger amounts of gold through leverage with a smaller investment.
However, there are drawbacks too: leverage comes with higher risks, the contract must be executed before the expiration date, and trading futures requires certain expertise.
Gold in its digital form
Cryptocurrencies exist in a variety of types and forms, including gold-related ones. A digital token represents a certain amount of gold — it can be sold and bought as easily as stocks or forex.
Note that the cryptomarket is extremely risky and your trades depend on your chosen platform or broker. Always check the company’s background and only work with regulated brokers. It also involves transaction and storage fees, so make sure you are aware of extra expenses so they don’t come as a surprise.
The goal | Best asset |
Long-term wealth preservation | Physical gold |
Active trading & speculation | Gold futures or options |
Low-cost, easy access | Gold ETFs |
Hedging against inflation | Physical gold |
Leveraged trading | Gold futures or options |
Short-term price speculation | Futures, options, or ETFs |
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Step 3: Pick your strategy
A well-thought-out strategy based on market conditions, risk tolerance, and needs is a key to success.
What is your trading style?
Different approaches work for different timeframes and goals. Do the market research and choose an approach that works for you and your goals.
For day traders scalping might be optimal: capturing small price movements in highly liquid gold markets.
For swing traders — breakout trading: entering when gold moves past a key resistance or support level.
Trend following — riding the momentum of gold’s uptrend or downtrend — works for short- and long-term traders.
Analyzing gold market conditions
If inflation is rising, gold tends to increase in value (for example, during the 2022 inflation surge). If interest rates rise, gold may drop as bonds and cash become more attractive.
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Analysis and risk management
Different market analyses may seem difficult at first, but they build a solid foundation for your trading. Use fundamental analysis: watch economic data, CPI, NFP, and Fed policies. Don’t ignore technical indicators like moving averages, RSI, ATR and Fibonacci retracements. Read more about these and other indicators in the FBS article “What is Technical Analysis in Trading?”.
Let’s look at the average true range (ATR) indicator. It can help find entry points. Just open the XAUUSD chart, and insert the ATR with the 15 period. If the ATR climbs up, the gold price will boost even higher.
A key step for every trader is wise risk management. Set stop orders to limit losses and diversify your gold assets.
Strategy example: use a moving average crossover
One of the ways to profit from the frequent trends in gold is to use a moving average crossover strategy. According to this approach, gold is worth buying if a shorter-term moving average crosses above a longer-term moving average. So it’s better to sell gold when the shorter-term moving average crosses below the longer-term average. How to pick a good interval for the two moving averages? A crossover of 10-period and 60-period moving averages on the 1-hour chart may be a good option — you can trade in the middle of a trend.
Strategy example: follow the level of real interest rates
Fundamental analysis allows traders to use info from different factors and benefit from it. For example, interest rates: lower interest rates lead to higher gold prices. Note that this strategy works only for long-term traders!
If you are a long-term trader, you may consider buying opportunities if real yields are below 1% and use the yield on Treasury inflation-protected securities
(TIPS) as a proxy for real interest rates in the US. But, if the yield on TIPS rises above 2%, investors usually focus on sell trades.
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