How to Trade Gold | A Beginner’s Guide to XAU Trading

This guide explains how to trade gold as a beginner, step by step. As one of the oldest and most stable forms of money, gold has an instinctive appeal. It also makes a natural complement to a trading portfolio that’s heavy on stocks or forex, as long as you understand the different types of gold trading and the factors that move the gold market.

The value of gold

Gold has been used as currency for longer than anyone can remember; the only older form of cash is, perhaps, seashells. It has limited practical uses but also some particular virtues: it’s impossible to forge, the total supply is limited, it does not decay, and it’s entirely fungible (one ounce of gold is physically the same as any other). Also, it’s…shiny…and a universally accepted way to store wealth, just like fiat (national, central bank-issued) currency. There is an important wrinkle, though: gold tends to gain in value when fiat currencies become unstable or interest rates fall.

Even in a world where financial derivatives sometimes dominate the conversation, many traders gravitate towards this precious metal, partly because it is a physical product that exists in the real world and not just as numbers on a computer. The price of gold is also not dictated by central banks or monetary policy, meaning that it will always hold intrinsic value. For a forex trader, this sets it apart from most currencies, which could theoretically become almost worthless in certain economic environments.

Is trading gold a good idea?

Financial innovations like CFDs and ETFs have made it far easier for beginners to trade gold, whereas relatively few had access to the market in past decades. Buying and selling gold used to be complex because it involved the actual transfer of ownership of gold bullion, coins, jewellery, or other forms of the precious metal.

beginner learning how to trade gold and XAU price charts

Today, there are numerous methods available for trading gold online, including the spot and futures markets, as well as options and exchange-traded funds specialising in gold markets.

Partly as a result of the expansion in market participation, precious metals like gold have high liquidity. The daily trading volume of gold is higher than most currency pairs, excluding only the majors such as EUR/USD, USD/JPY, and GBP/USD. One consequence of this is that the amount of capital needed to start trading gold is often very low. The tight spreads and high liquidity associated with this market make speculating on the price of gold popular with a large number of traders.

Gold as a safe haven

Many investors are attracted to gold due to its reputation as a safe haven for their money. Traders flock to these kinds of stable, defensive investments when markets are extremely volatile or experiencing significant downturns, primarily 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; demand for it often causes the gold price to rise when markets are in turmoil or when inflation becomes a concern. At these times, gold is an effective hedge against both established trends and unexpected events.

In what ways can beginners trade gold?

Those looking to buy and sell gold on a relatively frequent basis, perhaps even day trading the precious metal, need to look into financial instruments and trading strategies other than simple gold investments. Let’s look at a few different types of gold investments and their associated trading vehicles.

Spot gold CFDs

The gold and forex markets are similar in that the gold price fluctuates constantly; its current value is referred to as the spot price. Those who cut their teeth in the foreign exchange arena will also find the market dynamics familiar: spot gold trading is, for instance, conducted in pairs. Gold contracts are typically denominated in the US dollar, so the most common “currency” pair for trading the metal uses the USD. The chemical symbol for gold, Au, leads to the symbol XAU/USD.

The easiest way to trade the gold price short-term is to buy or sell CFDs (Contracts for Difference). High trading volumes in the dollar-gold market imply that, when investors go long on gold CFDs, they are essentially buying gold and selling the dollar. Conversely, when going short, they are betting on the USD rising against XAU.

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 because of the logistical complications this would entail. Gold futures contracts are typically settled in cash or sold on to other traders before their expiry dates.

The benchmark gold futures contract is the COMEX price in Chicago, but the Shanghai Gold Exchange has a growing influence on the market. The standard gold futures contract represents 100 troy ounces of gold. In case you were wondering, this translates to a little over 3 kilograms or 6 pounds of the metal.

Gold mining stocks

Shares in companies that extract gold are, unsurprisingly, highly correlated with the spot gold price. Looking at historical data, these stocks tend to be a high-volatility reflection of the commodity itself. If the price of gold moves upward or downward by only 5%, gold stocks might lurch 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. Other major producers include Russia, China, Canada, the United States, Kazakhstan, and Ghana.

Gold ETFs

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

What affects gold trading prices?

Although there is no central authority that controls the price of gold by decree, a wide range of factors affects price movements in the precious metal. Gold traders generally can’t rely solely on technical analysis but also need to keep an eye on economic news.

Supply and demand

Just like high-school economics tells us, most valuable assets’ prices are primarily determined by supply and demand. The number of sellers vs that of buyers plays a significant role in the price movements of gold, which is just the number at which their views on the state of the market meet:

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.

Note that only about 3,500 tons of new gold is mined annually, whereas around 220,000 tons have been extracted over the course of human history. Short of a massive, sparkly asteroid hitting Earth, supply-side shocks tend to come in the form of existing reserves being sold off, not more of the commodity becoming available.
Understanding this balance is essential for anyone who wants to trade gold profitably.

Monetary inflation and deflation

Inflation – rising prices as a result of declining currency purchasing power – is often a sign of a growing economy, during which time central banks will introduce more money into circulation. This, in turn, generally leads to a devaluation of the currency, as more notes and electronic cash 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 against currency values, and its price falls as investors move to other, more productive assets. To put this in slightly different ways, gold tends to go down when interest rates go up, and vice versa.

The US Dollar and Gold Trading

Gold is mostly dollar-denominated, meaning that the performance of the dollar has a significant effect on the price of gold, even when traded in other currencies.

US dollar and gold price chart used when trading gold

In normal circumstances, gold has an inverse relationship with the USD, meaning when the price of the “world’s reserve currency” falls, the price of gold rises and the other way around. The reason for this is that traders look to other investments, such as gold, when the dollar is performing poorly. More buyers mean an increase in demand, which pushes up prices.

Geopolitical factors

Gold’s status as a popular safe-haven investment implies that the precious metal performs well when geopolitical turmoil reigns. 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?

Profitable gold trading relies on using the correct financial instrument, from spot gold trading to gold stocks, then deciding how frequently you wish to trade. Investors new to the market often wonder about the best time to trade gold. Typically, the market sees most volatility during US trading hours, when gold futures contracts are most active in Chicago. Regardless of the timeframe you choose for trading gold, five highly important considerations should drive your strategy:

Is market sentiment risk-on or risk-off? Are investors feeling confident or cautious?
How is the USD performing?
Is the current market demand for gold high or low?
Is the precious metal in short supply? How much is being mined this year?
Does technical analysis indicate a developing gold price trend?

By combining the answers to these questions with the use of technical indicators, a trader should be able to identify the overall attitude of 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 essential before placing any trade.

Very few investors and day traders focus exclusively on gold. However, it is one commodity everyone should keep in mind when they trade gold, either as a hedge or an opportunity to make a profit.