Let’s face the fact; there’s no asking ‘What’s all the fuss about here?’ Humankind has been captivated by gold as a source of commercial value for centuries. Regardless of economic and political turmoil, it’s fairly clear that no other commodity boasts such a long-standing trust record. Considered a “safe-haven asset”, gold has the highest appeal for investors in the tough times of natural disasters, wars, monetary policy change, hyperinflation, or any sort of other turbulence.
So what influences gold prices?
Supply and demand
Just like any commodity, gold can be moved by changes in demand and supply. A fall in demand will mean a fall in price, while a rise in demand will lead to a price increase. The opposite goes for supply. The higher the supply - the lower the price, and the lower the supply - the more prices will skyrocket.
Since gold is traded in U.S. dollars, it’s also influenced by the currency’s rises and falls. A strengthening U.S. dollar could push gold price down, due to the inverse relationship between the two. When the dollar is strong, people tend to invest in it, and vice versa.
Taking interest rates into account, the rule of thumb goes as follows: when interest rates are low, cash and bonds tend to provide a low return. This pushes investors to seek alternative ways (and gold becomes one of the widely sought options). In contrast, when interest rates are high, investors can get strong returns in cash and bonds, so there’s ‘no need’ for gold.
While it’s not a golden rule (pun intended), higher levels of inflation tend to push gold prices higher, whereas lower levels weigh on gold. Why so? Well, inflation is almost always a sign of the economy growing, in which case it's common for the Federal Reserve to expand the money supply. This makes assets maintaining purchasing value in the future (such as gold) – more costly. And the other way round.
In periods of political, financial or environmental uncertainty, gold – unlike currencies – has no risk of becoming worthless. Instead, it becomes a “safe haven”. What’s wise to keep in mind is: uncertainty is hard to measure. Unlike all the factors above, it is a psychological and investor-dependent factor.
Where do we go from here?
To be fair, there’s no one right way to trade gold, as there is no one right way to trade any commodity or currency out there. Nevertheless, here are some things to consider before trading Gold:
A classic short-term trading strategy for gold could be using a moving average crossover. A trader looks to buy when a shorter-term moving average crosses above a longer-term moving average. He might choose to sell when the opposite happens.
When it comes to long-term gold trading, all the focus goes on Fundamentals, such as interest rate levels. This way, when real yields are below the historically supported norm for gold prices, it may be time to consider a buying opportunity. And vice versa – when real yields are higher, it could be a sign that it’s time to sell.
Nevertheless, markets are relative. We advise using several indicators when trading based on the technical and fundamental analysis.
*Risk Warning: CFDs are complex instruments that come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts, lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.