If you want to know how to trade gold (XAU), it’s important to know what really drives market sentiment.
To some, like the British economist, John Maynard Keynes, gold was little more than a ‘barbarous relic’. And yet, to others, such as the gold bug community, it’s revered as the only true money.
The US dollar may no longer be redeemable in gold. And, long gone are the days you could use it to purchase goods or services. But despite all this, gold remains an important part of the global money system.
With the imbalances in our current financial world, once again gold is taking centre stage as a preserver of wealth and safe haven.
And with a major black swan event currently upon us, by way of the Coronavirus pandemic, gold is getting a very large bid from the panic taking over world markets.
This article explains what you need to know about online gold trading and useful strategies to level up your trade. In the end, you will know how using the Mitrade trading platform you can participate in the ongoing gold market.
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- The Historic & Recent Price Performance Of Gold/XAUUSD >
- How Does The Future Of Gold Price Look? Expert Forecasts For XAUUSD Investing >
- Gold/ XAUUSD Trading: What Should You Know? >
- 3 Things You Must Follow Trading Gold >
- How To Trade Gold Online? 4 Effective Ways >
- Investing Or Trading In Gold (XAUUSD) On Mitrade Australia >
- Conclusion >
Gold is, without doubt a highly volatile asset.
It can go from years of inertia to exploding in price.
We are going through one of these price explosions right now, because of rampant fear brought on by the deadly coronavirus.
For many years though the gold price was fixed, at $35 US dollars an ounce.
Due to expanding war costs in Vietnam, US President Nixon ended the last remnants of a gold-standard by ending international dollar convertibility into Gold.
Soon a major gold bull market was unleashed that over the next 10 years saw the price briefly touch $850 an ounce.
Then, gold declined into a long bear market with a price bottom of $271.98 in the early 2000s.
Ever since then, the price has been rising in a renewed bull trend. Below is a chart of the London gold fix price going back to 1970. As you can see the long-term gold price is clearly gathering momentum for a push past $1800.
The chart below, courtesy of Goldprice.org clearly tells the story of the Gold price since 1975.
According to the World Gold Council the year 2020, as in previous years the main factors affecting gold will likely be:
● financial and political uncertainty
● low-interest rates
● continued central bank buying
● speculative buying
● structural economic reforms in China and India leading to retail buying
Despite many financial institutions actually hating gold as an asset (because it pays no dividend) many of them have been forced to recognize it’ is now in a long-term bull market.
Let's take a look at some of their price projections from the beginning of the year.
Goldman Sachs Target Price XAUUSD $1600
Concerns of trade wars and a potential US shock election result from seeing US presidential candidate, Bernie Sanders enter the White House; are cited as reasons for continued price appreciation in gold this year.
ING Target Price XAUUSD $1500
Trade wars, dovish policy from the leading central banks will be supportive of gold prices.
Bank of America Merill Lynch Target Price XAUUSD $2000 within two years
Michael Widmer is one of the more bullish analysts and suggests that continued purchases by central banks will be one of the main drivers of gold alongside trade wars, and slowing global growth.
Citibank Price Target XAUUSD $1525
The bank cites the low-interest rate cycle and monetary policy as reasons to buy gold
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Coronavirus and Gold
The above projections might actually be where the gold price does trade by year-end. However, none of these analysts could have predicted the major impact the coronavirus was going to have on the world economy.
Stock markets have gone into complete meltdown. The VIX has spiked higher. The Treasury Bond market has gone into overdrive.
There is rampant fear out there.
China has been struggling to contain the virus and at the same time restart the economy.
There have been major hits to tourism in South East Asia, cancellations of major public events and untold disruption to supply chains.
And now both in Europe and America we are starting to see the coronavirus take hold there too!
The Chinese have a saying, ‘may you live in interesting times’.
Well, as a gold trader, it rarely gets more interesting than this.
It’s never nice to profit from someone else’s misfortune, but gold is the ultimate fear gauge and like it or not, these are the very conditions where gold traders can make impressive gains.
Currently gold is catching a bid from a market panic over a global economic shutdown, sometime in the future the virus will be brought under control.
And with so much interest in gold right now, it’s actually a great time to examine what other factors are important when analyzing the gold market.
⭐ Gold is an insurance policy during systemic financial stress
Among seasoned investors and high net worth individuals, gold is seen as an insurance policy.
Because it tends to be inversely correlated to stock market returns it’s used to hedge large stock portfolios.
These large players drip-feed purchases into their portfolio on a dollar-cost averaging basis.
Many of them buying don't care what the price of gold is or will ever be.
For these astute investors, the metal acts as an insurance policy against financial shocks to the monetary system.
⭐ The Gold bugs
Gold is also regularly purchased by fanatics of the metal known as gold bugs. They’re responsible for physical purchases in main coin but also bullion form in the United States, Canada, and Australia.
Goldbugs have a distrust of big government and currency debasement.
They see the metal as the ultimate form of protection. To them, gold is not just an asset class, it is the only asset class
⭐ Gold-backed exchange traded funds
The price of XAUUSD was given a major boost with the emergence of State Street’s, gold-backed ETF (stock ticker GLD) back in November 2004
Since then, several ETFs have come onto the market.
The invention of gold-backed ETFs has made the buying of gold through the stock market possible, and brought the metal to the attention of investors who would never have considered purchasing the real thing.
Traded like any normal stock, the gold ETFs are the best way for stock investors to participate in the long-term gold bull market without worry about storage fees or having to hide gold coins.
⭐ Physical buying from India and China
While US stock investors love their gold ETFs, ask a Chinese or Indian to buy a paper claim on gold and you're likely to get a strange look!
This could be said for most of Asia too, particularly Thailand, Vietnam, and Malaysia all of whom prize physical gold highly.
In the huge gold buying markets of India and China, it’s physical jewelry that is demanded.
These two ancient cultures have a strong affinity and love of gold dating back thousands of years.
This can be seen at certain times of the year, where massive gold buying takes place.
Such as the Chinese Lunar New Year (late Jan-Feb) and the Indian wedding season (late Sept-Feb).
⭐ Central bank purchases
The main central banks, the Fed, Bank of England, or Bank of Japan, claim that gold holds no importance in the modern world. But as they say this, other central banks around the world continue to buy it at a fast pace.
Both the Russian and Chinese central banks are among the largest purchasers, not surprising as they wish to diversify their holdings away from the US dollar.
⭐ COMEX futures market
Without a doubt, the biggest price setter of them all for gold though takes place on the US commodity futures markets.
This is the place where the largest miners, speculators, banks and commodity trading funds all come together to set trade amongst themselves.
Here you’ll find mining companies such as Barrack Gold and Newmont Mining.
Their business is not trading or investing but digging up gold from the ground and selling it.
So, if they think the price is high now and will fall, they lock in prices today and deliver their product in the future.
There are other traders too; commodity funds, swap dealers, banks working on behalf of high net worth clients who either want to participate in gold price speculation or want to purchase large physical deliveries.
As stated above the price of the yellow metal is primarily set on COMEX.
And a large part of that reason is the fractional reserve nature of gold trading there.
90% of gold futures contracts are settled in cash, not physical metal.
This paper trading of gold can be at odds with real supply-demand fundamentals of the physical market.
Which explains why India and China demand might dwarf the physical markets of America, but it’s the US futures that’s the most important price setter.
We can use this knowledge to our advantage when trading gold.
⭐ The commitment of traders report
Every week, on a Tuesday, a little-known report is released that highlights the positioning of all traders on the futures markets.
The COT report shows us where the smart money is positioned. This ‘smart money’ includes the hedgers of metal such as gold miners, fabricators, and most importantly the swap dealers.
The report is, without doubt, the most useful sentiment indicator in the world for gold trading and one that is free for every like you or me to view.
Yes, it takes time to understand how to read the report – but as a gold trader is it well worth its weight in gold (pun intended)!!!
⭐ Price seasonality
This offers another way to have gold price tailwinds behind you.
The best months to see a rising price are from September through to May. The cycle goes something like this:
gold price bottoms, purchases start in Aug just before the Indian wedding season
futures trading volumes grow as traders come back from summer holidays
Xmas sees retail buying in the northern hemisphere
January and February see large scale purchases for Lunar New Year in most of Asia
traders go on holiday in May, gold price tops
Of course, these are generalities.
Not every year follows the same path but more often than not, the gold price is quiet in the months of June-August and picks up later.
The best seasonality occurs when other price drivers are affecting gold and the most important driver of gold appreciation and the one you must follow I discussed next.
⭐ Negative real rates
What drives gold is the expectation of negative real rates of interest
Real interest rate = nominal interest rate – inflation rate
Inflation is when price rises occur, that aren’t caused by supply-demand factors.
It isn’t a major concern when currencies are pegged to precious metals.
But currencies are generally free-floating nowadays, meaning inflation is constantly eroding your hard-earned money.
It's a complex topic and one for another time, but in simple terms, the steady debasement of a nation’s currency results in higher prices for us all.
Central banks do their best to contain inflation through interest rate policy.
In high-interest rate environments, investors tend to shun gold.
But what happens when interest rates are low and inflation high?
This is known as a negative real rate of interest, and it is the most powerful reason that investors trade gold as a financial asset.
As a gold trader, the most important data you need to know is the rate of inflation and the rate of interest.
There are several ways to do this:
Here are a few:
● physical bullion or coins
● gold ETFs
● futures Markets
● gold CFDs
Physical bullion or coins are a great insurance policy or portfolio hedge. If you buy gold bullion or coin you’re not aiming for capital appreciation, but preservation.
Gold ETFs are a way to trade gold online. They’re suitable for long-term investors. They’re not traded on margin, meaning the sum of capital you invest is equal to the sum of stock you possess.
The gold futures market has high barriers to entry and is not suited to all but the highest capitalized retail trader. Futures trading can also become complex particularly when expiration dates are concerned.
Gold CFDs, on the other hand, have no expiry. They are a legitimate way for the smaller capped trader to trade gold.
CFDs are traded on margin, meaning that a small good faith deposit is all that is needed to control a much larger trading position.
This means that you get much more ‘bang for your buck’ than if you were trading without margin.
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Mitrade is a regulated Forex CFD broker. Its trading platform is a user-friendly state-of-the-art platform allowing you to trade markets from forex to commodities to stock indices.
▼Go long or Go short when Gold prices fluctuate wildly▼
Specifications for trading gold online on Mitrade platform:
|Contract size: 100 Troy Ounce|
|Minimum volume per trade: 0.01 Lots|
|Maximum volume per trade: 30 Lots|
|Leverage: 1 : 100|
|Average Floating Spread : 35|
|Minimum Stop Order Distance: 50|
For more details, please check the Mitrade app.
Hopefully this ‘How to trade gold online in 2020’ primer, has given you an understanding of the most important price drivers in this market.
If you believe that gold is going up then you too can participate in the gold bull with Mitrade gold CFDs.
Alternatively, if you think the top of the Gold market has already been made, and that after coronavirus panic is quelled, prices will fall you can trade Mitrade gold CFDs from the short side too.
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