Introduction to Trading Gold A FOREX.com Educational Guide

Jerry Aguirre NewAdult

educational guide
FOREX 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
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
fact, gold has been used in human commerce
since the societies of the ancient Middle East
over 2,500 years ago, making it the oldest form
of money still recognized today. Gold’s long
track record as a store of value despite wars,
natural disasters, and the rise and fall of great
empires means that it is generally seen as the
ultimate “safe-haven” asset. While gold has generally held its value for
centuries, traders’ interest has waxed and waned
in recent years. From the early 1980s until the early
2000s, there was little interest in trading safe￾haven gold amidst the strong, stable economic
growth and high-flying stock markets. As a result,
gold generally consolidated between $300/oz and
$500/oz for twenty years, from 1982-2002
Interest in gold grew slowly through the 2000s
before exploding with the onset of the Great
Financial Crisis in 2008. Gold prices rose in
sympathy, hitting an all-time high above $1900 in
late 2011. In this guide, we will discuss the major
forces that drive gold prices, along with some
ideas for trading strategies and some of the most
common methods for trading gold.

Factors that influence gold’s price

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
supported by an underlying economy of workers,
companies, and infrastructure.
In other ways, gold is more similar to a commodity
like oil or corn because it comes from the ground and
has standardized physical characteristics. Unlike other
commodities, though, the price of gold often fluctuates
independently of its industrial supply and demand 10%
In fact, only about 10% of
the world’s gold is used
in industry: primarily in
electronics, due to its
conductivity and anti￾corrosive properties.
90%
The rest of the world’s gold
is either made into jewelry
or held for investment
purposes. Because of this dynamic, the emotions and
behaviors of traders tend to drive major
trends in the yellow metal. With gold
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
banks around the world are debasing their
currencies and bearish traders who assert
that gold is a “barbarous relic” of the past
that should be worth closer to $100. As
the chart above shows, the gold bugs’
view developed into a bit of a mania back
in the mid- and late-2000s, though the
more recent drop suggests gold may be
losing some of its previous luster. GOLD AND U.S. INTEREST RATES Historically, one of the most reliable determinants of
gold’s price has been the level of real interest rates, or
the interest rate less inflation. If you think about it, this
relationship is straightforward.
When real interest rates are low, investment alternatives
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) One of the biggest points of contention for gold
traders is on the true correlation between gold
and the U.S. Dollar. Because gold is priced in
U.S. Dollars, it would be logical to assume that
the two assets are inversely correlated, meaning
that the value of gold and the dollar move
opposite to one another. In layman’s terms, it
takes fewer dollars to buy an ounce gold when
the value of the dollar rises, and it takes more
greenbacks to buy an ounce of gold when the
value of those dollars is lower.
Unfortunately, this overly simplistic view of the
correlation does not hold in all cases. The chart
below shows the rolling

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