Unlock the secrets

of trading gold

AN INTRODUCTION TO TRADING GOLD

A FOREX.com educational guide

FOREX.com is a registered FCM and RFED with the CFTC and member of
the National Futures Association (NFA # 0339826). Forex trading involves
significant risk of loss and is not suitable for all investors. Spot Gold and
Silver contracts are not subject to regulation under the U.S. Commodity
Exchange Act. *Increasing leverage increases risk.
 Contents

1 So everyone’s talking about trading gold.

What is it all about?

3 Factors that influence gold’s price

5 What is the correlation between gold and the U.S. Dollar?

7 Gold trading strategies

11 Trading gold with FOREX.com

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 1

So everyone’s talking about trading gold.

What is it all about?

‘‘
Human beings have long valued and treasured
gold for its inherent luster and malleability. In
The desire for gold
fact, gold has been used in human commerce
since the societies of the ancient Middle East is the most universal
over 2,500 years ago, making it the oldest form and deeply rooted
of money still recognized today. Gold’s long commercial instinct

’’
track record as a store of value despite wars,
of the human race
natural disasters, and the rise and fall of great
empires means that it is generally seen as the Gerald M. Loeb,
Founding Partner of E.F. Hutton1
ultimate “safe-haven” asset.

1 . http://www.nationalgoldgroup.com/history-of-gold-coins/

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 2

Spot gold price in USD in oz

$2,000.0

$1,800.0
Prices expode in the
mid- and late-2000s
$1,600.0

$1,400.0

$1,200.0

$1,000.0

$800.0
Minimal interest in trading gold in the ‘80s & ‘90s

$600.0

$400.0
GFC

$200.0

$0.0
1985 1990 1995 2000 2005 2010

Source: World Gold Council

While gold has generally held its value for Interest in gold grew slowly through the 2000s
centuries, traders’ interest has waxed and waned before exploding with the onset of the Great
in recent years. From the early 1980s until the early Financial Crisis in 2008. Gold prices rose in
2000s, there was little interest in trading safe- sympathy, hitting an all-time high above $1900 in
haven gold amidst the strong, stable economic late 2011. In this guide, we will discuss the major
growth and high-flying stock markets. As a result, forces that drive gold prices, along with some
gold generally consolidated between $300/oz and ideas for trading strategies and some of the most
$500/oz for twenty years, from 1982-2002. common methods for trading gold.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 3

Factors that influence gold’s price

10%
Gold is one of the most difficult financial assets to
value. Gold is similar to a currency like the U.S. dollar
or the euro because it is durable, portable, uniform
across the world, and widely accepted; however, unlike
these more commonly traded currencies, gold is not In fact, only about 10% of
supported by an underlying economy of workers, the world’s gold is used
in industry: primarily in
companies, and infrastructure. electronics, due to its
conductivity and anti-
In other ways, gold is more similar to a commodity corrosive properties.
like oil or corn because it comes from the ground and

90%
has standardized physical characteristics. Unlike other
commodities, though, the price of gold often fluctuates
independently of its industrial supply and demand.

The rest of the world’s gold

is either made into jewelry
or held for investment
purposes.

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 4

Because of this dynamic, the emotions and

behaviors of traders tend to drive major Follow @FOREXcom on
Twitter for updates on latest
trends in the yellow metal. With gold price action and trade ideas.
more than any other asset, traders seem
to be polarized between diehard “gold
bugs” who believe that gold should be
worth $10,000 an ounce because central GOLD AND U.S. INTEREST RATES
banks around the world are debasing their
currencies and bearish traders who assert
that gold is a “barbarous relic” of the past Historically, one of the most reliable determinants of
that should be worth closer to $100. As gold’s price has been the level of real interest rates, or
the chart above shows, the gold bugs’ the interest rate less inflation. If you think about it, this
view developed into a bit of a mania back relationship is straightforward.
in the mid- and late-2000s, though the
more recent drop suggests gold may be
When real interest rates are low, investment alternatives
losing some of its previous luster.
like cash and bonds tend to provide a low or negative
return, pushing investors to seek alternative ways to
protect the value of their wealth.

On the other hand, when real interest rates are high, strong
returns are possible in cash and bonds and the appeal of
holding a yellow metal with few industrial uses diminishes.

One easy way to see a proxy for real interest rates in the
United States, the world’s largest economy, is to look at
the yield on Treasury Inflation Protected Securities (TIPS).

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 5

What is the correlation between

gold and the U.S. Dollar?

One of the biggest points of contention for gold Unfortunately, this overly simplistic view of the
traders is on the true correlation between gold correlation does not hold in all cases. The chart
and the U.S. Dollar. Because gold is priced in below shows the rolling 100-day correlation
U.S. Dollars, it would be logical to assume that coefficient between gold and the U.S. Dollar.
the two assets are inversely correlated, meaning The correlation coefficient measures how
that the value of gold and the dollar move closely together gold and U.S. dollar have
opposite to one another. In layman’s terms, it moved over the last 100 days; a reading of 1.0
takes fewer dollars to buy an ounce gold when would show that they moved in perfect lockstep
the value of the dollar rises, and it takes more with one another, while a reading of -1.0
greenbacks to buy an ounce of gold when the would show that their movements have been
value of those dollars is lower. diametrically opposed.

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 6

As you can see, the correlation is negative the majority

of the time, showing that the U.S. Dollar does tend to
move opposite to gold.

However, it has also shown a tendency to spike rapidly

in periods of financial stress, such as in the depths of
the Great Financial Crisis in early 2009 and the end of
the first iteration of Quantitative Easing in mid-2010.
This is because traders will buy both gold and the U.S.
dollar as “safe-haven” assets in periods of uncertainty.

Traders who blithely traded on the assumption that

gold and the dollar are inversely correlated would
have encountered a couple periods of tough market
conditions and likely losing trades over the past few
years. Gold’s correlation with the U.S. dollar is one
crucial piece of the puzzle, but as we noted above,
there are many other factors that drive gold’s value.

100-Day Rolling Correlation Coeficient

Between Gold and U.S. Dollar, 2006-2012
1

0.5

-0.5

-1
Date
5/11/2006

9/19/2006

1/30/2007

6/8/2007

10/16/2007

2/26/2008

7/3/2008

11/10/2008

3/23/2009

12/7/2009

12/7/2009

4/19/2010

8/25/2010

1/3/2011

2/12/2011

9/20/2011
1/30/2012

6/7/2012

10/15/2012

Source: Perth mint and Yahoo! Finance

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 7

Gold trading strategies

As with any trading instrument, there is no single “best” way to trade gold. Many
traders from other markets have found that the technical trading strategies they
employ on other instruments can easily be adapted to the gold market, especially
given gold’s tendency to form durable trends. For example, many traders have
found success adapting strategies based on trend lines, Fibonacci analysis and
overbought/oversold oscillators like RSI and Stochastics.

A SAMPLE SHORT-TERM STRATEGY:

CATCH THE “MEAT” OF THE TREND WITH A MOVING
AVERAGE CROSSOVER

For short-term traders, a classic way to try to Traders differ in their opinions on the “best”
profit from the frequent trends in gold is to use timeframes for the two moving averages, but
a moving average crossover strategy. In this we’ve found that a 10/60 moving average
strategy, a trader would look to buy gold if a crossover on the 1hr chart can be a strong
shorter-term moving average crossed above a combination for shorter-term traders.
longer-term moving average and sell when the Historically, these settings have allowed traders
shorter-term moving average crosses below the to successfully trade the middle portion of a
longer-term average. trend, though there is no guarantee of future
performance. The chart shows how this strategy
could be applied in the gold market:

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 8

Gold 1hr chart

SMA-1284.9400 10,0,1 SMA-1282.4917 60,0,1 .GOLD.cfd O-1288.0 H-1288.4 L-1286.9 C-1287.8

3
1340.0

BEARISH 10/60 cross - close buy trade

1
at $1315 (+$33), enter new sell trade
10-hour ma crosses below
60-hour ma - gold sell 1330.0
trade at $1318

1320.0

4
1310.0

1300.0
BULLISH 10/60
cross - close sell
trade at $1331,
enter new buy 1290.0
trade 1287.8
1284.9
1282.5

1280.0

1270.0

10-hour ma

60-hour ma
2 10-hour ma crosses back above 60-hour
ma - close sell trade at $1282 (+$36),
enter new buy trade
1260.0

1250.0

h 9h 16:00 10th 10th 13:00 14th 14th 11:00 16th 17:00 17th 17th 14:00 21st 22nd 22nd

Source: FOREX.com

1 At point #1, the shorter-term 10-hour moving average

crosses below the longer-term 60-period average,
suggesting that traders should enter a sell trade as a
3 After a brief consolidation, gold rallies back into the
lower $1300s, and the trade is closed on the bearish
moving average cross at point #3.
bearish trend may be forming. The moving averages

4
do not cross again until point #2 a few days later, after Like any methodology though, this strategy will
gold has trended down to the upper $1200s. produce losing trades as well. In this case, the big
spike near point #4 caused the sell trade from #3 to

2 At point #2, the initial sell trade is closed for a solid

gain and a new buy trade is triggered as the trend
shifts back to the topside.
be stopped out for a loss. It’s also important to note
that the trade must be closed at the market price (near
$1330) when the cross occurred, not the $1315 level
where the two moving averages actually crossed.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 9

This simple trading strategy can help traders catch

the middle portion of trends in more volatile trading
environments like the one highlighted above, but
using it when gold is merely consolidating in a
range can lead to a series of consecutive losing
trades. As a result, traders may want to consider
supplementing this strategy with other indicators to
improve its long-term profitability.

A SAMPLE LONG-TERM STRATEGY:

WATCH THE LEVEL OF REAL INTEREST RATES

Longer-term position traders and investors can focus more on the

fundamentals driving gold’s price, such as the level of real interest rates.
The chart below shows the relationship between gold prices and the yield
on TIPS, a proxy for real interest rates in the United States. The inverse
correlation is obvious, but it looks like gold’s rally accelerated as real yields
dropped below 1% in early 2009. Not surprisingly, a longer-term look at the
relationship would reveal that gold prices generally fell in the late 1990s,
which were characterized by real yields above the 1% threshold.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 10

Gold PRICE vs TIPS YIELD SINCE 2008

2000 4

1800 3
1600
2
1400
1 PRICE (left axis)
1200
TIPS YIELD (right axis)
0
1000

800 -1

600 -2
APR 14

OCT 14

APR 16
APR 15

OCT 15
APR 13

OCT 13
APR 12

OCT 12

JAN 14

JAN 16
JAN 15
JAN 13
JAN 12

JUL 14

JUL 16
JUL 15
JUL 13
JUL 12

Source: Federal Reserve & Perth Mint

Therefore, longer-term traders may want to The ability to use a filter based on real interest
consider buy opportunities if real yields are rates is one of the unique features that traders can
below 1%, a level which has historically been use to gain an edge when trading gold, but the
supportive of gold prices. Conversely, if real trading strategies and opportunities in trading the
yields rise above 2%, investors may want to focus world’s oldest “currency” are truly limitless.
more on sell trades. Of course, this relationship
between real yields and gold prices plays out
over longer-term timeframes, so shorter-term
gold traders can generally ignore the level of
interest rates.

Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk.
 11

Trading gold with FOREX.com

Some investors prefer to take physical possession of gold bullion
to ensure that they can access it at will, but that strategy can be
prohibitively expensive once additional costs to transport, store,
protect, and trade the bullion are accounted for. Instead, some
traders focus on trading the current “spot” price of gold, which
is based on the price of the most active futures contracts on the
COMEX (Commodities Exchange) in New York. Because these futures Gold is traded on 1:1 margin,
or 100% of the contract
contracts are actively traded in a central location every single day, value.
they provide the most accurate, up-to-date prices for gold.
The minimum lot size for
gold is 1 troy ounce.
FOREX.com’s spot trading is based directly on the actual price of
gold, not an exchange-traded product like some other products. The symbol for spot gold is
Gold offers diversification from other commonly traded markets. The XAU/USD.

inverse correlation with the U.S. dollar was covered at length above,
and gold has historically moved independently of stock and bond
market prices as well.

However, please be aware that there is no guarantee that it will be

correlated in the future and past performance is not indicative of
future results. Spot gold and silver trading is available 23 hours a day
from 6pm ET Sunday through 5pm ET Friday. Trading is closed from
5pm to 6pm ET daily. Spot gold and silver trading also follow CME
holiday closures.

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 12

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 FOREX.com is a registered FCM and RFED with the CFTC and member of the
National Futures Association (NFA # 0339826). Forex trading involves significant
risk of loss and is not suitable for all investors. Spot Gold and Silver contracts are
not subject to regulation under the U.S. Commodity Exchange Act. *Increasing
leverage increases risk.

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