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  • by Sophie Robinson
  • Nov 24, 2022
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Gold Trading on Forex Market: 10 Questions you may ask about Gold Trading

Most newcomers to the Forex market think that only currency pairs are traded here. But this is not true. You can also trade precious metals, the most popular of which is gold. 

1.   Why has it been so popular for thousands of years?Why has gold been so popular for thousands of years?

The speculators like this precious metal for its reliability, stability, predictability and safety: 

  • Gold is considered to be one of the basic quotes in all the stock exchanges of the world after oil.
  • The safest investment is gold bullion. In times of historical turmoil, gold has hardly ever been lost - it has only been melted down and accumulated. The metal is not susceptible to corrosion, and its reserves are not large.
  • In all banks of the world until 1971 it was kept as a reserve asset, despite the fact that its role as the international currency was diminishing.
  • Traders use the inverse correlation between gold and the US dollar. Forex trading strategies allow you to use the asset during both periods of growth and decline.

 

2.   Who and on Which Financial Markets can Trade Gold?who and on which financial markets can trade gold?

Transactions are settled on the two main stock exchanges: New York and London or at the major international gold trading centres, which are London, Paris, Zurich, Frankfurt, New York, Tokyo, Hong Kong and Dubai.  Physical gold is sold and bought on the wholesale over-the-counter markets, the largest of which is the London Bullion Market. Futures, options and other types of gold contracts are traded on the London Metal Exchange, New York Mercantile Exchange, Chicago Mercantile Exchange and other exchanges.

The spot price of gold is published twice a day on the LME.

Forex allows you to trade this instrument from anywhere in the world 24 hours a day. The trading is most active during the American session hours because the quote includes the US dollar and at the time when important news is published.

Due to the specific nature of gold, the main market players include central banks, government agencies, hedge funds, large private investors and gold mining companies.

 

З. What are the Specifics of Gold as an Asset?

The price of gold on the Forex market and other markets depends on the general health of the world economy, the economies of individual countries and regions, the geopolitical situation, and other factors. The price of gold always rises in case of any increased instability, and central banks actively buy it as soon as the national currency or other assets of a country lose their value and credibility. As soon as the situation returns to a stable calm, the price of gold goes down.

  

4. How does the price of Gold Correlate with Exchange Rates?

How does the price of Gold Correlate with Exchange Rates?

For centuries, gold has been regarded as a "safe haven asset" - during financial and banking crises, stock price declines, and inflationary processes, astute people start investing in precious metals. And this is understandable - when there is a depreciation of money, the population tends to ensure its savings. The more the government stimulates the economy by issuing more money, the more investors tend to increase their investment in gold.

 

5. How do Oil Prices and News Correlate?

When the price of oil goes down, gold also goes down. Similarly, when the price of oil goes up, gold also goes up.

When the news is good, gold prices will not decrease. However, the gold price immediately begins to rise due to negative news or forecasts. Sometimes it grows very rapidly if the market is panic-stricken.

 

 6. What Strategies should be used when Trading Gold on Forex?

What Strategies should be used when Trading Gold on Forex?

 Any strategy is preceded by fundamental and technical analysis.

When high-profile events occur in the world, the price of gold is bound to react strongly to them, which is the basis of many traders' strategies. So they monitor the news, the Euro and the Dollar exchange rates, and the price of oil.

If you are interested in buying gold, it makes sense to wait for the price to fall to its lowest level - you can see it on the XAU/USD chart. 

Usually, gold is bought to balance out the impact of inflation on the exchange rate. The purpose of such trades is not the long-term outlook, but the short-term profit taking. This tool is traded in order to realise other, more profitable investments and strategies.

Forex trading strategies for gold are divided into the following stages:

  • buy the metal at a favourable price
  • quickly sell it at the most favourable time
  • to obtain a small but quick profit.

There is the so-called Golden Waugh strategy, which is specially designed for trading gold on Forex. The trading belongs to the category of short-term intraday trading. It is based on the MACD indicator signals.

 

7. What is Gold Called on the Stock Exchange?

The abbreviation for this precious metal on exchanges is XAU.  What the letters stand for X is the last letter of the word "Forex", and AU (aurum) is the chemical symbol for gold in the periodic system of Mendeleev. The most common currency pair traded on the Forex market is XAU/USD and less frequently XAU/EUR. How gold is measured on the exchange: the international measure of gold is a troy ounce, which is equivalent to 28.5 grams. The smallest lot on the exchange is 100 ounces. 

 

8. What are Gold Futures?

 There are various ways to make money from gold assets. Physical bullion is good for long-term investing. Gold futures are for short-term trading. A gold futures contract is an agreement by which the buyer and the seller fix the price at which the transaction will be executed in the future. A distinction is made between two types of futures - delivery futures and settlement futures. A delivery futures commits the seller to deliver metal to the buyer at a particular time specified in the contract. In a futures contract, the delivery is not made.

There are other derivatives in which gold is the underlying asset. But futures are much more popular than the other instruments because they are clearer and more highly liquid. And they can be bought and sold before they expire. 

 

9. How much Money Do I need to Trade Gold Futures?

The amount depends on the type of futures, your risk management strategy and your goals. For a standard 100oz lot, you can trade with approximately 2000 USD in your account. But this is without taking into account your risk management - add to this the amount to cover your losses. If you are relying on leverage from a broker, be aware that in the futures markets the average leverage is up to about 1:20 - this is less than what forex brokers give you.

10. What are the Disadvantages of Trading Gold?

 

There are only two: The high spread. The leverage is usually lower than when trading currency pairs. CONCLUSION Historically, gold is the oldest traded instrument. But now it has moved into the background and given way to paper notes, electronic systems and cryptocurrencies. However, gold remains a sought-after tool for investors and forex traders.