How to Trade Gold - Trading Education | Pepperstone (2024)

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In this gold trading guide we will explore:

• The ease of which traders and investors can express a view on gold, and the fundamental reasons to buy and sell gold
  
• Strategies for trading gold CFDs
  
• How traders can boost returns by trading gold denominated in USD, EUR or JPY
  
• The periods during the day which gold typically moves.

With the acceleration in financial product innovation, traders can now express a view on the fortunes of gold more easier than ever before.

Long gone are the days where a trader had to buy a quantity of physical gold, jewellery or coins to gain an exposure to gold. Although, these are still popular vehicles for those investing in the long-term prospects of the yellow metal.

However, these days traders and investors can express a view on a short-term timeframe. Without the need to arrange storage, using gold CFDs (Contracts for Difference), ETFs (exchange-traded funds), futures or options.

What is the best way to buy gold?

Arguably the overriding consideration for understanding which of these instruments is most suitable, comes down to an individuals risk profile and the appetite for leverage within their strategy. However, we also need to consider typical hold time, frequency of trading, associated costs and necessary starting capital.

Pepperstone offers clients the ability to trade gold CFDs, and other precious metals as part of a broad commodity offering. Gold CFDs mirror the underlying spot gold price and can be one of the cleanest and efficient vehicles for expressing a view on gold.

Gold CFDs can be traded 24 hours a day, five days a week, which can be more attractive than a gold ETF (GLD ETF for example), which is only tradable during the exchange hours through which it is listed.

As with any CFD, rather than placing down the full-face value of the exposure, clients are only required to place margin, representing a percentage of the full notional value (i.e. the contract size multiplied by the gold price) - this is known as leverage.

For traders who want to take a view on shorter-term movements in gold, be it up or down, and without any predetermined close or expiry date (such as you’d see in options and futures), gold CFDs can be an effective vehicle to make ones capital go further and work harder. In turn, helping to spread the positions in the portfolio, which is the core principle of diversification.

How do you trade in gold?

Trying to pinpoint one specific reason why gold is moving can be quite challenging at times. Often requiring fundamentally focused traders to look at the correlation in the gold price relative to other markets, to better understand the drivers and investment appeal at that point in time.

For example, we tend to see the gold price rally when US Government bond yields are falling, often because inflation-expectations and economic data are deteriorating. When we overlap or visualise the two instruments together, we see these variables are incredibly tightly correlated, albeit inversely.

• Orange line - US 10-year Treasury (inverted)
• Candle chart - gold

Somewhat oddly, is the fact that because gold pays no income and therefore has no yield, this is seen as yield in itself. For example, when global bond yields are falling to such incredibly low levels or in many cases going deeper into negative territory, gold is bought as a hedge against a world of diminishing returns. It’s here where the cliché of gold being a store of value seems most fitting.

Of course, if the world is seen to be improving and US and global bond yields are increasing, the opportunity cost of holding gold is revisited and gold tends to face headwinds.

Can you trade gold CFDs?

We also see gold attracting buyers when the USD is sold, especially against the JPY and CNH. The perception is that gold becomes relatively more attractive given the increased currency purchasing power for those holding non-USDs. Importantly, traders can now trade gold CFDs denominated in USD, EUR and JPY with Pepperstone, where we simply convert the USD gold price real-time into EUR or JPY, using the current EURUSD and USDJPY spot price.

By buying gold in the weakest currency, or shorting in the strongest currency, traders can extract the maximum profit from each gold trade.

For example, if you think the EUR will underperform other major currencies in the week ahead, then buying gold priced in EUR terms, (XAUEUR on MT4/5) rather than in USDs makes sense. Subsequently, if EURUSD trades lower and the gold price rallies over the next week, then you would have made a higher percentage return than had you bought in USDs (XAUUSD).

What is the best time to trade gold?

In fact, it’s when gold is rallying when priced in any currency, be it in USD, EUR or JPY terms (or any other G10 currency), we know it's a bullish sweet spot for buyers to trade gold. This is the environment when traders see gold as an alternative currency in its own right.

If the appeal of holding the likes of USD, EUR, GBP, JPY and AUD are diminishing, perhaps as central banks try ever more creative monetary policy initiatives, then gold often acts as a currency and is seen as the best house in a very bad neighbourhood.

Gold as a hedge against rising uncertainty

Gold is often seen as a hedge against economic Armageddon or geopolitical uncertainty, and a backdrop where market participants have reduced confidence to adequately price risk, amid fast-moving markets and broad volatility. The degree and duration by which gold will rally is a product of the reason(s) for the spike in volatility and if the issue is confined to a region or is something far more global and interconnected. If we can isolate and understand the concern then we can go some way to identify the potential circuit breaker, usually in the form of a central bank or government policy action.

Counter to that, when we see positive sentiment sweeping through financial markets, where implied volatility falls, credit spreads narrow, equities, oil and bond yields march higher, we tend to see the appeal of holding gold declining and traders look to trade gold short and profit from a move lower in price.

Is it worth investing in gold CFDs?

Trading gold from a strategic standpoint is in many ways no different from any other market - that is, you need to look at the core trading considerations. For example, your reasons for buying or selling, achieving best execution, correct position size through risk control and expertly managing an open position. That said, clients who trade gold tend to be somewhat more myopic, almost ring-fencing their trading to gold rather than multiple instruments.

Trading gold using technical or price action analysis

Traders will use often combine a technical study/overlay to complement their fundamental approach, in the quest for a higher probability outcome. Some trade gold without any interest in the fundamental drivers, adopting the use of pattern recognition, support and resistance, oscillators, or pure price action to find their edge. The fact that gold is tradable 24 hours a day, five days a week, reduces the potential for gapping, further increasing gold’s appeal as a tradable market for both systematic and discretionary technical traders

The rapid rise in clients automating their technical strategies in MT4, MT5 or cTrader is also a consideration. Especially for those who have a strategy but are often affected emotionally by changes in market dynamics, causing them to act irrationally and erratically.

The best time to trade gold

Consider when moves and range expansion/contraction in gold typically occur within a 24-hour period. Having this level of clarity can be advantageous, especially for day traders, who want to enter and square off a position in one, perhaps even two, of the three trading sessions each day – those being Asia, London and the US.

In the chart below we have marked the individual sessions into shaded areas (purple – Asia, green- London, orange – US), representing the high-to-low of the trading range in that session. Using this sample and it’s clear that gold has consistently subdued high-low trading ranges through Asia, so this may not suit a trader whose strategy works best in higher volatility.

For short-term term traders, being active in front of the screens in the cross over period seen between London to US trade is best and a likely reflection that most of the impactful tier-one data releases or influential central bankers speak during this period.

If you’re interested in trading gold, Pepperstone can help you find the edge to master the trade.

Gold trading

On our platform you can trade gold against both the US dollar and euro in a similar way to other currency pairs.

*Average spreads updated April 2021