Trading Gold (XAUUSD): Technical and Fundamental Analysis of the Precious Metal
Valutrades gives you the opportunity to trade Gold and Silver on their MT4 and MT5 platforms.
So? What of what do we need to be aware if we want to trade Gold?
Trading in Pairs
If you are new to trading, or even if you are not, your instructor and our many videos have shown you that you have to “think in pairs” when trading any instrument. Gold is no different in that most gold trades and transactions are paired with USD.
The price of XAUUSD is displayed on your platform and it represents the value in USD of a Troy Ounce (about 31 grams) of Gold. In this article, we will cover what moves the value of this ounce of Gold.
To put it all into perspective, its value in August of 1999 was about $250. The monthly chart above shows the meteoric climb of the price of Gold to peaks in 2011, falling into 2015, and then to its current bull run to where we are now with a value of well over $2,000 in May of 2023.
On three occasions between 2020 and 2023, price action on Gold spent time above the US$2,000 level.
Fundamental and technical factors influence the price of Gold but the trader must also consider everything that affects its counterparty — the US Dollar.
The 2 daily charts above show similar directions of another USD pair — AUDUSD. We can easily see that the peaks, troughs, bear runs, and bull runs of price action are very similar. Does this mean that the price of Gold and the Australian Dollar are correlated? Not necessarily. It does, however, mean that the USD is a big driver of price action for XAUUSD.
Fundamental Analysis of the Gold Markets
If you have learned anything from the Valutrades lessons, the videos, and the blogs, it is that price movement is about supply vs demand. Gold, as a commodity, is no exception. When Gold is in demand, the price rises. When Gold is not in demand, the price falls. However, the supply of Gold is less of an issue than say Silver, Copper or Oil.
Silver, Copper and Oil are stored (supply) and used (demand) in the manufacture of products. Gold, for the most part, is used to store value. For example, if central banks start buying more Gold, the value increases and vice-versa.
Often, trading Gold after unexpected news can reap rewards if the trader is fast enough. For example, many geopolitical events like aggressions, typhoons, earthquakes, etc., can cause investors to quickly lose confidence in the equity markets and shift their investments to cash and/or Gold, thereby driving up the price. The calming of tensions after these geopolitical events can then cause the price to fall back to previous levels.
One major exception to this rule is illustrated in the chart above. When the COVID-19 pandemic hit the planet in March 2020, the price of Gold fell $250 in a matter of days. Why? Wouldn’t this huge geopolitical event cause investors to look for a safe haven and have the price of Gold go up?
The truth was that banks, wealth funds, and hedge funds all over the world were seeing vast amounts of capital wiped off their books by the falling equity markets. The way to balance their customers’ portfolios was to sell their holdings in Gold and maintain the portfolios in cash for a while.
Fundamental Analysis of USD
Again, Fundamental Analysis of the US Dollar is critical as well, as this often drives price action on XAUUSD more than anything already mentioned. In general, the trader needs to treat Gold just like any other USD pair and follow anything the US Federal Reserve does or says.
For example, the US Non-Farm Payrolls, US Inflation, US Interest Rate Decisions, etc., will always be a big factor in your Gold trading.
Like any instrument you trade, you should always follow the fundamentals first, then the technicals. Technical analysis on Gold is not much different from any other instrument and the Valutrades MT4 and MT5 platforms give you all the tools you need.
To be fair, Gap Trading is actually a combination of both technical and fundamental analysis. The gap is always caused by a fundamental event, usually when markets are closed but when the gap is filled, we follow technical indicators on our charts.
Price action chart patterns like Double Tops, Pennants, Wedges, and Descending Triangles, all work well with Gold.
Like anything, traders always want confirmation before they enter a position and technical indicators are important. Here, for example, we are using the Stochastic Oscillator to confirm the reversals of price action off a level of support and off the upper trend line.
The indicators can also be used to confirm the exiting of positions as well.
In these daily charts, we can also use MACD to spot the reversals. The yellow boxes indicate where the signal line left the MACD histogram, corresponding with price action reversals.
If you have been trading for any length of time, you would have tried Fibonacci retracements. Of course, they don’t always line up but, when they do, they can be an incredibly reliable source for spotting levels of support and resistance.
In this chart, all Fibonacci levels corresponded with key levels and reversals were confirmed by the stochastic oscillator. Feel free to experiment with different confirming indicators until you find a system that works for you.
The Economic Calendar
In closing, always check an economic calendar before you trade. There is no item on the calendar that will specifically affect Gold but, any item which will move the USD is what you have to look out for.
Some traders avoid trading around news events while others use price action movement, driven by fundamental events, to their advantage. Above, for example, we see where a news event quickly drove price action into a technical level. We could then open a position in the direction of the prevailing trend.
With Gold, just like any instrument, “the trend is your friend”.