How to Trade Gold | XAU Trading for Beginners

As one of the oldest forms of money, people instinctually want to trade gold. Learn the different types of gold trading possible and what moves the gold market.

  • The Value of Gold
  • Is it good to trade gold?
  • Gold as a haven asset
  • How do you trade gold for beginners
  • Different ways to invest in gold
  • Spot Gold | Gold futures | Gold mining stocks | Gold ETFs
  • What affects the price of gold?
  • How do you trade gold successfully?
  • Create a gold trading account

 

The value of gold

Gold is amongst the oldest forms of currency and has been viewed as a store of value for thousands of years. It has limited practical uses but is accepted as a form of wealth, just like fiat currency. Gold tends to gain in value when fiat money and the interest that can be earned with it falls.

Seen as a store of value, many traders gravitate towards the precious metal because it is a physical product that exists in the world and not just numbers on a computer. Gold is also not controlled by central banks or monetary policy, meaning that it will always hold intrinsic value, unlike currencies, which could become almost worthless in certain economic environments.

Is it good to trade gold?

Financial innovations like CFDs and ETFs has made enabled many people to start trading gold who might have had access otherwise. Buying gold used to be complex because it involved the actual ownership of gold bullion, coins, or other forms of the precious metal.

 

gold trading

There are numerous methods to trade gold online including the spot and futures markets, as well as options and exchange traded funds on gold.

Precious metals like gold have high liquidity similar to the forex market. The daily trading volume of gold is higher than most currency pairs, excluding majors such as EURUSD, USDJPY and GBPUSD, meaning that the costs to start trading gold are often very low. The tight spreads and high liquidity available make speculating on the price of gold popular with a large number of traders.

Gold as a safe haven

Many investors start trading gold as a safe haven investment. Traders flee to safe haven investments when markets are extremely volatile or experiencing significant downturns, as a way to reduce risk and limit their exposure to potential losses. Gold has long been known as one of the main safe haven investments, popular amongst traders when markets are in turmoil and effective as a hedge against inflation, during which times, the price of gold usually rises.

How do you trade gold for beginners?

For those looking to buy and sell gold on a more frequent basis, perhaps even day trading gold, then different financial instruments and trading strategies are needed to simple gold investments. Read through the next section to find out about the different types of gold investments and trading vehicles for gold.

Different ways to invest in gold

Spot Gold CFDs

Spot gold trading is similar to trading forex in that it is conducted in pairs. Gold contracts are typically denominated in the US dollar, so spot gold is usually paired against the USD. The chemical symbol for gold XAU is used to form XAU/USD. This means that, when going long on gold CFDs, a trader is simultaneously buying gold while selling the dollar. Conversely, when going short, they are selling gold and buying USD.

Gold Futures

A gold futures contract is an agreement to buy or sell gold at a specific price on a future date. They can technically be used to take possession of the physical commodity, but gold futures traders rarely choose to do this and typically settle for cash or sell the contract before expiry instead.

The benchmark gold futures contract is the COMEX price in Chicago but there is a growing influence of the Shanghai Gold Exchange. The standard gold futures represent 100 troy ounces of gold.

Gold mining stocks

Gold stocks are highly correlated to the gold price and tend to be a high volatility version of trading the commodity itself. If the price of gold moves by 5%, gold stocks might move by 10% or more in the same direction. Some of the best-known gold industry players are listed in Australia, including Barrick Gold, Franco Nevada and Newmont Mining.

Gold ETFs

Exchange traded funds (ETFs) can either track the movement of the underlying commodity itself (in this case gold) or a basket of publicly traded gold mining stocks. Investing in an ETF offers greater diversification versus a single stock. Popular gold ETFs include tickers GLD, IAU & SGOL. There are also mini gold ETFS that trade in smaller units.

What Affects the Price of Gold?

Although the price of gold is not controlled by any central authority, there is a range of factors that affect price movements in the precious metal.

1. Supply and Demand of Gold

As is the case with most valuable assets, supply and demand play a significant role in the price movements of gold.

 

gold supply and demand

If demand for the precious metal is high whilst supply remains low, the price of gold will increase due to the lack of availability. Conversely, if the supply of gold increases and demand remains low, prices will fall.

2. Gold investing with Inflation and Deflation

Inflation is often a sign of a growing economy, during which time central banks will introduce more currency into circulation. This, in turn, will lead to a devaluation in the currency, as more notes become available. Investors subsequently flock to gold, which maintains its value during inflationary periods, leading to a rise in the price of the precious metal. Conversely, during times of deflation, gold is no longer sought as a hedge, and its price falls as investors move to other assets.

3. Gold vs the US Dollar

Gold is dollar-denominated, meaning that the performance of the dollar has a significant effect on the price of gold.

 

gold vs us dollar

In normal circumstances, gold has an inverse relationship with the USD, meaning when the price of the dollar falls, the price of gold rises and vice versa. The reason for this is that, when the dollar is performing poorly, traders look to other investments such as gold and this increase in demand pushes up prices.

4. Geopolitics impact on Gold

Gold’s status as a popular safe haven investment means that the precious metal performs well in times of geopolitical turmoil. During times of war, trade disputes, disruptive national elections and other major events, demand increases as investors look for a stable store of value, leading to a rise in the price of gold.

How do you trade gold successfully?

Successful gold trading means using the correct financial instrument from spot gold trading to gold stocks – then deciding how frequently you wish to trade. A frequently asked question is – what is the best time to trade gold? Typically there is the most volatility during US trading hours when gold futures contracts are most active in Chicago. No matter the timeframe for trading gold – these are the five most important considerations:

 

  1. Is market sentiment risk-on or risk-off?
  2. How is the USD performing?
  3. Is the physical demand for gold high or low?
  4. Is the precious metal in low supply? Ie how much is being mined?
  5. Use technical analysis to analyse the gold price trend

 

By combining the answers to these questions with the use of technical indicators, a trader will be able to identify the overall trend in the market and place their trades accordingly. Developing a sound risk management strategy, including the use of appropriate stop loss and take profit levels, to protect against unexpected volatility in the gold market is also important before placing a trade.

Create a gold trading account

It’s not necessary to create a specific account for trading gold because most the main ways to invest, except buying physical coins is available in a multi-asset trading account.

Trade gold with FlowBank today.

 

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