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Nick Goold

Gold is probably the world's oldest tradeable commodity and still plays a vital role in today's global economy. Gold markets have been around in one form or another for centuries.

What drives gold price changes?

Depending on the mood in the financial markets at any given time, the primary drivers of gold prices may change. Some of the key things to watch out for are listed below.

Inflation and interest rates

Since the precious metal maintains its value despite the declining purchasing power of fiat currencies, high inflation has historically supported the gold spot price.

Therefore, monetary policy decisions made on inflation by the world's largest central banks are critical because interest rates are the primary tool central banks use to control the inflation rate. Gold does not yield a return apart from price rises, so higher interest rates reduce the attractiveness of holding gold, and prices can fall.

Gold and USD

The US dollar

Gold prices typically move in the opposite direction from the dollar, even though the US dollar is no longer pegged to the gold standard.

As the US dollar rises in value against other currencies, gold becomes more expensive for buyers holding non-US dollar currencies, and so demand falls. On the other hand, a fall in the dollar's value makes gold cheaper for overseas buyers, which increases demand.

Physical demand

The demand for gold jewelry impacts the precious metal's price. In China and India, gold jewelry is frequently given as a gift during weddings and festivals and purchased as an investment.

The demand for gold jewelry typically increases during periods of rapid economic growth. During the COVID-19 pandemic, gold demand decreased because consumers could not visit physical jewelry stores due to lockdowns.

Small but significant amounts of gold are also used in industrial and electronic applications.

Investment demand

The markets for jewelry and investments account for the majority of the demand for gold.

Because gold is seen as a safe-haven asset that maintains value, investment demand for the precious metal tends to increase during economic or geopolitical uncertainty periods. Investment demand may rise due to economic downturns, stock market volatility, geopolitical unrest, natural disasters, and unanticipated events like the coronavirus pandemic.

Investors can purchase physical gold bars, coins, and gold-linked financial instruments like mutual or exchange-traded funds (ETFs). Depending on market sentiment, investment demand can be highly volatile, but it typically ranges around 1,000 tonnes annually, according to information gathered by the World Gold Council.

Gold mine

Gold production (supply)

Changes in mining output can impact gold prices. Gold traders watch for new mines coming online or disruptions to current mines to forecast future prices. According to data from the World Gold Council, approximately 3,500 metric tons of gold are mined annually, up from roughly 2,800 metric tons a decade ago. In addition, every year, 1,100 additional metric tons are recovered through recycling.

China, Australia, Russia, and the US held the top four spots for gold production over the previous ten years. South Africa was once a significant player but has recently slipped in importance.

Central banks

Central banks play a crucial role in determining gold prices as they are some of the world's largest holders of gold reserves. The actions of central banks, such as buying or selling gold, can significantly impact the supply and demand dynamics of the precious metal, ultimately influencing its price.

How to trade or invest in gold

Depending on your trading or investing approach and the make-up of your portfolio, you have various options for trading gold, including purchasing physical metal and using derivatives. The price of one troy ounce of gold is represented by the currency code XAU, which reflects the past use of the gold standard to determine the value of different currencies. It also refers to the price of one troy ounce of gold.

Gold bullion

Investors often purchase precious metals in physical form to protect themselves from inflation and stock market declines. In addition, since physical metal operates outside the banking system, it is simple to buy and sell and is regarded as a low-risk asset. Owning actual metal, however, necessitates setting up secure storage and incurring storage expenses.

Gold bullion

Spot gold

Spot Gold refers to the price for the precious metal to be bought and sold with immediate settlement.

Gold futures

Trading gold futures contracts is a good option if you believe the metal's price will increase significantly in the future. These contracts trade on commodity exchanges and allow investors to speculate on the future price of gold. Under the contract, the buyer agrees to deliver a specified amount of gold at a specific price on a set date in the future, usually on standardized dates.

The three main global, regional markets for gold futures are the over-the-counter (OTC) market between dealers, brokers, and banks in London, the Commodity Exchange (COMEX) in the US, and the Shanghai Gold Exchange in China.

Gold options

Trading options are an alternative to purchasing or reselling physical gold or futures contracts. There are two types of gold options that you can trade: calls and puts.

A call option grants the owner the right to purchase gold at a predetermined price on the option contract's expiration date. The option to sell gold at the predetermined price on the expiration date is provided by a put.

Despite the similarities between futures and options, an option contract does not require the buyer to take the position, but the buyer can force the seller to take the position. The buyer pays a fee, or premium, for the right to do this. Options use physical gold or futures as their underlying asset, meaning if the buyer forces the contract to be exercised, the seller must deliver (for a call option) or take delivery (for a put option) of physical gold in the specified amount. In practice, though, physical gold is seldom actually delivered. Instead, the buyer of the in-the-money option sells it to someone else or sells it back to the original seller to make a profit.

Gold stocks

Stocks of mining companies are an alternative to investments in assets directly correlated with the price of gold. You can research companies in the gold industry and trade their stocks through your share dealing account to learn how to invest in gold stocks.

Gold ETFs

Exchange-traded funds (ETFs) provide a method of purchasing gold through your brokerage account that functions similarly to stock trading. Like individual company stocks, ETFs are traded on stock exchanges. However, in contrast to mutual funds, whose prices settle only once daily and may take even longer to settle, ETF prices fluctuate throughout the trading day.

Gold CFDs

Cash For Difference contracts ( CFDs ) allows you to speculate on the direction of the yellow metal's price without worrying about storing or delivering the physical gold. CFDs are a specific kind of contract that a trader and a broker enter into to profit from the price differential between opening and closing the trade. They are also leveraged products that allow you to trade on margin.

Gold trading strategies

Gold trading strategies

Instead of making decisions based solely on speculation, various gold trading strategies can assist you in deciding when to enter and exit a trade and how to manage a position while it is open. However, a trading strategy created for another asset, such as a stock or currency pair, might function differently for gold.

Trend trading

To spot strong trends, traders analyze patterns in the price movement of gold. A price in an upward trend is generally expected to keep rising, while a price in a downward trend may continue to fall.

Traders often use technical analysis to identify and confirm price trends. Technical indicators can help them determine when an upward or downward trend changes and adjust their position accordingly.

Day trading

Day traders only hold positions open for a single trading session, trading the intraday price fluctuations. Gold lends itself well to day trading because it is a highly liquid asset with narrow spreads between the ask and bid prices. In addition, day traders can concentrate on buying or selling gold on a particular day or time by using news events.

Price action trading

When using the price action strategy, traders look at the most recent price movement to determine when to enter or exit a position. Unlike most technical analysis-based approaches, traders do not look at historical charts. Instead, they only pay attention to recent price movements.

Arbitrage trading

Additionally, traders can take advantage of arbitrage opportunities by using price differences in gold contracts on regional exchanges like the Shanghai Gold Exchange, London Metal Exchange, and COMEX to buy the metal on one exchange and sell it on another.

Advantages of trading gold CFDs

Trading gold CFDs saves you the cost of paying for physical gold storage. You can trade gold in both directions using CFDs as well. So whether you think the price of gold will rise or fall, you can profit from the price movement by taking a long or short position.

However, you should be aware that trading CFDs involves risks because these products are leveraged, which increases the size of losses if the price moves against your position and maximizes gains if the price moves in your favor. Therefore, doing your own research and understanding how leverage works before you start trading is essential.