Gold trading with fundamental analysis

Gold trading with fundamental analysis

A good reason for trading gold is that the price of gold tends to fluctuate more strongly than traditional Forex currency pairs such as the EUR / USD. For example, the major currency pairs usually rise or fall by about 8% annually, while the gold price sometimes rises 100% within a few months. Although the cost of trading gold in terms of spread and commission is much greater than trading forex currency pairs, this larger price move tends to make it more profitable in general. For example, the cost of trading the EUR / USD pair is usually less than 0.01% of the position size, whereas the cost of spot gold trading is usually 0.02%, but when the potential profit in trading gold prices is 10 times that of trading EUR / USD pair, this difference does not matter. So let's discuss the most important factors that contribute to the volatility of gold prices.


The best gold trading strategies

The report on the best gold trading strategy or strategies requires that you study the difference between trading gold using technical or fundamental analysis, or more. So let's take the basics of these strategies and how they have performed over the past decades to help you make that decision


Gold trading with fundamental analysis

Unlike stocks or precious commodities like crude oil, gold has very little in value, as it has few practical uses. However, gold is a rare item, and people are attracted to it and have got the value unanimously. It is impossible to measure small fluctuations in this human perspective from day to day, and therefore from this point of view, fundamental analysis has a limited value. Another aspect of gold that distinguishes it from paper currencies, such as the US dollar, is that it is limited in terms of supply. This is supposed to mean that there is a limited amount of gold that can be taken or given. The problem with this analysis is that almost the entire world knows that gold exists with governments and banks, but no one knows for sure exactly how much it is. It seems that the big banks, which have worked for years to stabilize the price of gold through "fixing gold" twice daily, are able to manipulate the principles of supply and demand. Fortunately for those who want to trade gold, the basic analysis of gold prices can be applied through a macroeconomic analysis. For example, analysts usually see the value of gold rise under the following conditions:


  • High inflation.

  • Economic crises / instability.

  • The US dollar fell.

  • Negative real interest rates.

Gold price correlation with US inflation

One of the important features of the precious metal that everyone involved in gold trading has to take into account is the relationship of the price of gold to American inflation. The United States has not experienced high annual rates of inflation, which are defined as levels above 6%, since the beginning of the eighties. The United States suffered from high inflation during the late 1970s and early 1980s, and the price of gold increased significantly during this period. There was a strong correlation between gold and inflation during this period, but when inflation rose again during the late 1980s, the value of gold declined, the bottom line is that the price of gold can rise when inflation reaches unusually high levels, and there is a small positive correlation between change Monthly price of gold and the US inflation rate during the entire period from 1976 to 2019. The correlation coefficient between the two years was 17.24%, with 100% indicating a full correlation, and 0% indicating that there was no correlation at all. This means that it is likely that it would be wise to expect gold to rise strongly only when inflation reaches an unusual rise, but it also makes sense that there will be an increase in the price of gold when inflation rises and a decline when inflation falls.


Gold / US inflation correlation chart

Gold / US inflation correlation chart


Gold price correlation with economic crises / instability

It is difficult to create economic crises or instability objectively. However, there can be little doubt that a country embroiled in a major economic crisis tends to see its currency depreciated. As everyone knows the gold trader, the economic crisis in the United States during the past decades occurred during the seventies, and this was a period when the value of gold prices in US dollars increased significantly. It appears that the price of gold has risen during the economic crisis in the United States, but we do not have much data for this case.


Gold price correlation with the US dollar index

As everyone who is interested in trading gold knows, gold prices are priced in US dollars. You can expect the price of gold in dollars to be very positive correlated with the US dollar index, which measures fluctuations in the relative value of the US dollar against a basket of other major currencies. Correlation coefficient of all monthly price changes for gold and the US dollar index from 1976 to 2019, showing a small positive correlation of about 25.23%.

When we consider that we measure the price of gold in US dollars, this correlation is not very strong, but it may have use in technical analysis, which we will discuss later in this article.

Gold / USD correlation chart


Gold / USD correlation chart


Gold price correlation with negative real interest rates

Since gold is considered by many people as a stock of value with limited availability, while monetary currencies can be reduced or inflated artificially by central banks and governments that control them, it can be said that the price of gold in paper currencies such as the US dollar It will increase when the value of the currency decreases. Indicators of a devaluation of a particular currency include high inflation, which we have already discussed, and negative real interest rates. A currency has a negative real interest rate when its inflation rate is higher than the interest rate, because the value of the currency falls more than it pays interest, and therefore depositors of that currency are exposed to net losses over time.

The problem we face here is that the US dollar has suffered a negative real interest rate only twice since 1976: during a very short period in the late 1970s, and again during 2018 and 2019. This means that we, who are interested in trading gold, do not have a sample long enough to perform a statistically strong analysis of the correlation between gold and the negative real interest rate, but it is true that the price of gold in US dollars has increased significantly during these periods, and therefore it seems possible that there is a positive correlation.

We can examine the correlation between the gold price and American interest rates, but since interest rates tend to be closely related to inflation rates, we have already covered this aspect.


Gold trading with seasonality

"Seasonality" is a type of fundamental analysis based on the theory that the demand for a specific asset such as the price of gold, where gold prices tend to rise or fall with the seasons of the year. For example, the price of natural gas tends to rise during the winter in the northern hemisphere, as the cold climate raises demand for it. It is difficult to see the same logic applied to gold, but the following table shows that there are certain months of the year when gold performed either better or worse than average. I don't think the seasonality principle applies well to gold trading, but I do provide this data anyway. From 2001 to 2019, the price of gold increased in 56% of the months.


Seasonality of gold


Data indicate that August and September were particularly good months for buying gold, while February and July were good months for selling gold.

Fundamental Analysis of Gold - Summary

This precious metal has shown tendencies for price hikes during periods of unusually high inflation, severe economic crises or negative real interest rates. In the long run, the gold price has not shown any strong negative or positive correlation with stock markets, and at a more small level, it is often true that when markets are above the "avoid risk" position, money tends to flow towards the Japanese yen, Swiss franc and gold trading. Thus, gold traders can learn to explore “avoid risk” tendencies and find trading opportunities for buying gold during these times.


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Gold trading with technical analysis

Technical analysis is the art of determining whether future price movements can be predicted from previous price movements. In this comprehensive guide to trading gold, we will look back at whether gold price movements in recent decades have been able to tell us anything useful. Gold has shown a tendency to buy since 1976. Its price has risen in more than 51% of the months, and the average months have seen a price increase of 0.55%. The average monthly change in price during this period was 0.07%. These statistics indicate that gold, as a limited store of value, may tend to rise against fiat currencies. If this is true, it indicates that the search for long positions is more reliable than short positions. It seems logical, as paper currencies suffer from inflation, while real assets, such as gold and stocks, do not suffer from it, which attracts many to trading gold. Real assets such as gold and silver tend to rise in value over time. It should be noted that gold, like most liquid speculative assets, tends to move in the direction of. This means that one of the best technical analysis methods you can use here is to determine whether the price of gold is moving in a particular direction or not, and then trading with that direction.

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