Greetings to all lovers of gold trading. You’ve made a truly difficult choice. Trading on this pair is radically different from trading simple currencies. You have no chances if you enter the market unprepared. Your Stop Loss levels will be constantly knocked out and it is unlikely that you’ll manage to get out of a losing streak.
In order to trade gold, you need to understand the trends in its behavior, find out what causes such behavior, and select the appropriate strategies. In a series of articles about this instrument, we will go a little deeper into the history and learn about the nuances of working with XAUUSD.
Historical Reference
Gold was among the first 7 metals found by people another 4-5 thousand years BC and was immediately recognized as precious. Such a conclusion can be made based on the results of ancient excavations. The archaeologists keep finding coins and jewelry made of gold at the ancient burial sites.
At some point, the presence of precious metals began to determine the financial status of countries. At the time of the advent of paper currency, the gold standard became a determining of its value. This scheme worked successfully until 1971 when the United States decided to abandon it, which led to the global reform of the Forex.
In 1978, the United States decided to evaluate other currencies with the US dollar. After abandoning the gold standard, the number of notes secured by the metal has sharply decreased and their number has been growing ever since. This led to the fact that European countries began to actively return their US dollars, demanding gold in return.
Today, economists still crave for a comeback of the gold standard, but this is not possible in the near future. This creates an excellent opportunity for speculation in the Forex market.
Where the Gold Comes From
There is not much gold on Earth, but due to its properties of forming into bars and concentrating in specific areas, its extraction is quite simple. Leading countries in the mining of precious metals change over time, as gold reserves are gradually depleted. Five leaders for today:
- China
- Australia
- Russia
- USA
- Canada
The value of currencies of the leading countries often correlates with gold. This is especially true of the Chinese yuan. Central banks of these countries have an impact on quotes of world currencies and gold.
Who Has the Gold
Even though the United States has abandoned the gold standard, they continue to accumulate precious metal in order to support its economy. To date, the USA is the leader in the amount of stocked gold. The leaders of the gold fund are:
- USA
- Germany
- Italy
- France
- Russia
The replenishment of the gold fund also affects the rate of the metal and the value of local currencies. When a country's economic crisis begins, part of the gold reserve is thrown into the market to increase the number of foreign currencies available, such as the euro and the US dollar.
Gold in Industry
Gold is also affected by the demand for it in the industry. It is used for the manufacture of jewelry, in the chemical industry, in the production of computers, mobile phones, and other devices, and in other fields.
Such a correlation is easy to trace at times of crisis. Gold prices drop with a decline in the economy and rise with its growth.
Trends of Gold
The XAUUSD pair behaves just like any other Forex instrument. It is characterized by uptrends, downtrends, and flats, by the reaction to the major news releases and to seasonality, by growth and decline in activity during certain periods of the day, etc.
If you look at the XAUUSD chart, you can trace the following trends:
- Since the beginning of the XIX century, quotes have been growing steadily
- In 2011, gold turned sharply and began its downward movement
- Since 2014, the pair is moving in a wide range
The fact that gold is in flat doesn’t mean that you can’t trade on it. If you look at the daily chart, you can find quite long-term trends. For example, in 2018, gold confidently moved downwards from spring to the end of summer. By the way, we have an article about gold trading tips in Forex, that may improve your results. If you build your strategy on short and medium-term trades, then you have all the chances to make good money on gold.
Seasonality in Forex Gold Trading
Just like any other Forex instrument, gold is subject to seasonality. For example, before Christmas quotes begin to grow and this growth usually continues until the end of January.
A sharp growth is also observed in late summer. At this time, the volume of trade in other currency pairs is reduced. Due to the low liquidity on other instruments, traders are looking for more suitable markets and switch to gold trading.
Let’s review what we have learned today. Now we know what exactly affects the price of gold, what it’s main trends are, as well as how it is affected by seasonality. In the next article, we’ll take a closer look at the strategies and nuances of gold trading. Stay tuned.