UNLOCK THE SECRETS

OF TRADING GOLD
Contents
1 So everyone’s talking about trading gold.
What is it all about?

3 Factors that influence gold’s price

5 What is the correlation between gold and the U.S. Dollar?

7 Gold trading strategies

1 Trading gold with FOREX.com

1
 1

So everyone’s talking about trading gold.

What is it all about?

‘‘
Human beings have long valued and treasured
gold for its inherent luster and malleability. In
fact, gold has been used in human commerce
The desire for gold
since the societies of the ancient Middle East is the most universal
over 2,500 years ago, making it the oldest form and deeply rooted
of money still recognized today. Gold’s long commercial instinct

’’
track record as a store of value despite wars,
natural disasters, and the rise and fall of great
of the human race
Gerald M. Loeb,
empires means that it is generally seen as the Founding Partner of E.F. Hutton1
ultimate “safe-haven” asset.
 2

Spot gold price in USD in oz

$2,000.0

$1,800.0 Prices expode in the

mid- and late-2000s
$1,600.0

$1,400.0

$1,200.0

$1,000.0

$800.0 Minimal interest in trading gold in the ‘80s & ‘90s

$600.0

$400.0 GFC
$200.0

$0.0
1985 1990 1995 2000 2005 2010

Source: World Gold Council

While gold has generally held its value for Interest in gold grew slowly through the 2000s
centuries, traders’ interest has waxed and waned before exploding with the onset of the Great
in recent years. From the early 1980s until the early Financial Crisis in 2008. Gold prices rose in
2000s, there was little interest in trading safe- sympathy, hitting an all-time high above $1900 in
haven gold amidst the strong, stable economic late 2011. In this guide, we will discuss the major
growth and high-flying stock markets. As a result, forces that drive gold prices, along with some
gold generally consolidated between $300/oz and ideas for trading strategies and some of the most
$500/oz for twenty years, from 1982-2002. common methods for trading gold.
 3

Factors that influence gold’s price

10%
Gold is one of the most difficult financial assets to
value. Gold is similar to a currency like the U.S. dollar
or the euro because it is durable, portable, uniform
across the world, and widely accepted; however, unlike
In fact, only about 10% of
these more commonly traded currencies, gold is not the world’s gold is used
supported by an underlying economy of workers, in industry: primarily in
electronics, due to its
companies, and infrastructure.
conductivity and anti-
corrosive properties.
In other ways, gold is more similar to a commodity
like oil or corn because it comes from the ground and

90%
has standardized physical characteristics. Unlike other
commodities, though, the price of gold often fluctuates
independently of its industrial supply and demand.
The rest of the world’s gold
is either made into jewelry
or held for investment
purposes.
 4

Because of this dynamic, the emotions and

behaviors of traders tend to drive major Follow @finastictrading on
instagram for updates on latest
trends in the yellow metal. With gold more price action and trade ideas.
than any other asset, traders seem to be
polarized between diehard “gold bugs” who
believe that gold should be worth $10,000
an ounce because central banks around the GOLD AND U.S. INTEREST RATES
world are debasing their currencies and
bearish traders who assert that gold is a
“barbarous relic” of the past that should be Historically, one of the most reliable determinants of
worth closer to $100. As the chart above gold’s price has been the level of real interest rates, or
shows, the gold bugs’ view developed into a the interest rate less inflation. If you think about it, this
bit of a mania back in the mid- and late- relationship is straightforward.
2000s, though the more recent drop
suggests gold may be losing some of its
previous luster. When real interest rates are low, investment alternatives
like cash and bonds tend to provide a low or negative
return, pushing investors to seek alternative ways to
protect the value of their wealth.

On the other hand, when real interest rates are high, strong
returns are possible in cash and bonds and the appeal of
holding a yellow metal with few industrial uses diminishes.

One easy way to see a proxy for real interest rates in the
United States, the world’s largest economy, is to look at
the yield on Treasury Inflation Protected Securities (TIPS).
 5

What is the correlation between

gold and the U.S. Dollar?

One of the biggest points of contention for gold Unfortunately, this overly simplistic view of the
traders is on the true correlation between gold correlation does not hold in all cases. The chart
and the U.S. Dollar. Because gold is priced in below shows the rolling 100-day correlation
U.S. Dollars, it would be logical to assume that coefficient between gold and the U.S. Dollar.
the two assets are inversely correlated, meaning The correlation coefficient measures how
that the value of gold and the dollar move closely together gold and U.S. dollar have
opposite to one another. In layman’s terms, it moved over the last 100 days; a reading of 1.0
takes fewer dollars to buy an ounce gold when would show that they moved in perfect lockstep
the value of the dollar rises, and it takes more with one another, while a reading of -1.0
greenbacks to buy an ounce of gold when the would show that their movements have been
value of those dollars is lower. diametrically opposed.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 6

As you can see, the correlation is negative the majority

of the time, showing that the U.S. Dollar does tend to
move opposite to gold.

However, it has also shown a tendency to spike rapidly

in periods of financial stress, such as in the depths of
the Great Financial Crisis in early 2009 and the end of
the first iteration of Quantitative Easing in mid-2010.
This is because traders will buy both gold and the U.S.
dollar as “safe-haven” assets in periods of uncertainty.

Traders who blithely traded on the assumption that

gold and the dollar are inversely correlated would
have encountered a couple periods of tough market
conditions and likely losing trades over the past few
years. Gold’s correlation with the U.S. dollar is one
crucial piece of the puzzle, but as we noted above,
there are many other factors that drive gold’s value.

100-Day Rolling Correlation Coeficient

Between Gold and U.S. Dollar, 2006-2012
1

0.5

-0.5

-1
2/12/2011
1/3/2011

10/15/2012
11/10/2008

1/30/2012
9/20/2011
5/11/2006

10/16/2007

6/7/2012
4/19/2010
12/7/2009

12/7/2009

8/25/2010
1/30/2007
9/19/2006

7/3/2008
Date

3/23/2009
2/26/2008
6/8/2007

Source: Perth mint and Yahoo! Finance

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 7

Gold trading strategies

As with any trading instrument, there is no single “best” way to trade gold. Many
traders from other markets have found that the technical trading strategies they
employ on other instruments can easily be adapted to the gold market, especially
given gold’s tendency to form durable trends. For example, many traders have
found success adapting strategies based on trend lines, Fibonacci analysis and
overbought/oversold oscillators like RSI and Stochastics.

A SAMPLE SHORT-TERM STRATEGY:

CATCH THE “MEAT” OF THE TREND WITH A MOVING
AVERAGE CROSSOVER

For short-term traders, a classic way to try to Traders differ in their opinions on the “best”
profit from the frequent trends in gold is to use timeframes for the two moving averages, but
a moving average crossover strategy. In this we’ve found that a 10/60 moving average
strategy, a trader would look to buy gold if a crossover on the 1hr chart can be a strong
shorter-term moving average crossed above a combination for shorter-term traders.
longer-term moving average and sell when the Historically, these settings have allowed traders
shorter-term moving average crosses below the to successfully trade the middle portion of a
longer-term average. trend, though there is no guarantee of future
performance. The chart shows how this strategy
could be applied in the gold market:

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 8

Gold 1hr chart

SMA-1284.9400 10,0,1 SMA-1282.4917 60,0,1 .GOLD.cfd O-1288.0 H-1288.4 L-1286.9 C-1287.8

3
1340.0

BEARISH 10/60 cross - close buy trade

1
at $1315 (+$33), enter new sell trade
10-hour ma crosses below
60-hour ma - gold sell 1330.0
trade at $1318

1320.0

4
1310.0

1300.0

BULLISH 10/60
cross - close sell
trade at $1331, 1290.
enter new buy 0
trade 1287.
8
1284.
9
1280.0
1282.
5
1270.0

10-hour ma

60-hour ma
2 10-hour ma crosses back above 60-hour
ma - close sell trade at $1282 (+$36),
enter new buy trade
1260.0

1250.0

h 9h 16:00 10th 10th 13:00 14th 14th 11:00 16th 17:00 17th 17th 14:00 21st 22nd 22nd

Source: FOREX.com

1 At point #1, the shorter-term 10-hour moving average

crosses below the longer-term 60-period average,
suggesting that traders should enter a sell trade as a
3 After a brief consolidation, gold rallies back into the
lower $1300s, and the trade is closed on the bearish
moving average cross at point #3.
bearish trend may be forming. The moving averages

4
do not cross again until point #2 a few days later, after
gold has trended down to the upper $1200s. Like any methodology though, this strategy will
produce losing trades as well. In this case, the big
spike near point #4 caused the sell trade from #3 to be

2 At point #2, the initial sell trade is closed for a solid

gain and a new buy trade is triggered as the trend
shifts back to the topside.
stopped out for a loss. It’s also important to note that
the trade must be closed at the market price (near
$1330) when the cross occurred, not the $1315 level
where the two moving averages actually crossed.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 9

This simple trading strategy can help traders catch

the middle portion of trends in more volatile trading
environments like the one highlighted above, but
using it when gold is merely consolidating in a
range can lead to a series of consecutive losing
trades. As a result, traders may want to consider
supplementing this strategy with other indicators to
improve its long-term profitability.

A SAMPLE LONG-TERM STRATEGY:

WATCH THE LEVEL OF REAL INTEREST RATES

Longer-term position traders and investors can focus more on the

fundamentals driving gold’s price, such as the level of real interest rates.
The chart below shows the relationship between gold prices and the yield
on TIPS, a proxy for real interest rates in the United States. The inverse
correlation is obvious, but it looks like gold’s rally accelerated as real yields
dropped below 1% in early 2009. Not surprisingly, a longer-term look at the
relationship would reveal that gold prices generally fell in the late 1990s,
which were characterized by real yields above the 1% threshold.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 10

Gold PRICE vs TIPS YIELD SINCE 2008

2000 4

1800
3
1600
2
1400
1 PRICE (left axis)
1200
TIPS YIELD (right axis)
1000 0

800 -1

600 -2
OCT 12

OCT 13

OCT 14

OCT 15
APR 12

APR 13

APR 14

APR 15

APR 16
JAN 12

JAN 13

JAN 14

JAN 15

JAN 16
JUL 12

JUL 13

JUL 14

JUL 15

JUL 16

Source: Federal Reserve & Perth Mint

Therefore, longer-term traders may want to The ability to use a filter based on real interest
consider buy opportunities if real yields are rates is one of the unique features that traders can
below 1%, a level which has historically been use to gain an edge when trading gold, but the
supportive of gold prices. Conversely, if real trading strategies and opportunities in trading the
yields rise above 2%, investors may want to focus world’s oldest “currency” are truly limitless.
more on sell trades. Of course, this relationship
between real yields and gold prices plays out
over longer-term timeframes, so shorter-term
gold traders can generally ignore the level of
interest rates.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 11

Trading gold with FOREX.com

Some investors prefer to take physical possession of gold bullion to
ensure that they can access it at will, but that strategy can be
prohibitively expensive once additional costs to transport, store,
protect, and trade the bullion are accounted for. Instead, some traders
focus on trading the current “spot” price of gold, which is based on the
price of the most active futures contracts on the COMEX (Commodities
Exchange) in New York. Because these futures contracts are actively Gold is traded on 1:1 margin,
or 100% of the contract
traded in a central location every single day, they provide the most
value.
accurate, up-to-date prices for gold.
The minimum lot size for
gold is 1 troy ounce.
FOREX.com’s spot trading is based directly on the actual price of
gold, not an exchange-traded product like some other products. The symbol for spot gold is
Gold offers diversification from other commonly traded markets. The XAU/USD.

inverse correlation with the U.S. dollar was covered at length above,
and gold has historically moved independently of stock and bond
market prices as well.

However, please be aware that there is no guarantee that it will be

correlated in the future and past performance is not indicative of
future results. Spot gold and silver trading is available 23 hours a day
from 6pm ET Sunday through 5pm ET Friday. Trading is closed from
5pm to 6pm ET daily. Spot gold and silver trading also follow CME
holiday closures.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 12

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Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.