The gold price is a global benchmark for the value of the metal. It is traded globally and can be used to measure the relative worth of other commodities. The price of gold is determined by supply and demand, which are influenced by factors like inflation, interest rates and political stability. Here, we discuss in detail about the key factors that influence the price of gold: Visit MT4 Platform
Gold Trading Explained
Humans have valued and treasured gold for years now because of the lustre and malleability associated with it. Ever since ancient civilizations in the Middle East adopted gold exchanges 2500 years ago, gold has been a major commodity in areas like trade and investing. It’s safe to say gold has been around for thousands of years and is one of the oldest forms of currency. Throughout history, gold’s value has remained stable even with all the wars, natural disasters and changes that have occurred. It will always be a reliable store of value.
Though gold hasn’t changed much in value over the years, its interest rate feels the effects of economic downturns. There was a slow growth in gold’s interest before 2008, but it became the hot topic and a commodity in demand as the Great Financial Crisis was taking off.
Gold prices have never been higher, rising to an all-time high of over $1900 in late 2011. One of the most important factors affecting gold prices are interest rates and inflation. Here are a few strategies you could use when trading gold.
Factors that Influence the Price of Gold
The price of gold is mainly influenced by factors such as – changes in supply, physical demand, expectations of interest rate changes and inflation. Let’s take a close look at these factors.
Supply & Demand
Increases in the demand for gold make the price go up and vice versa. Gold is a commodity that remains in demand, so its prices are highly influenced by supply and demand.
Inflation
It is said that when gold prices respond to inflation, people often choose to invest in gold. This is because if inflation increases and the currency values fall, people tend to hold on to their money in the form of gold. When inflation is high for a long period, gold becomes an effective tool to protect against inflation. The value of currency moves all the time, but gold is more stable in the long run.
Interest Rates
Gold and interest rates tend to move in opposite directions. When interest rates go up, people prefer to sell their gold so that they can use the money for other uses (ex. investing). After interest rates are low enough, people prefer buying gold as it offers a higher yield in higher returns.
Import Duty
Gold is not produced in every country and is sourced from different parts of the world. Different countries impose different import duties, which affect the fluctuation of price.
Gold Reserves
Almost all world governments maintain reserves for gold and as such it buys more than it sells, the price rises. The opposite happens if it is selling more than it is buying.
Currency Fluctuations
The price of gold is influenced by fluctuations in international currencies, with the dollar becoming a more valuable currency as the others depreciate. Incredibly, this process also works to offset any rise in the value of gold.
Combats Volatility and Uncertainty
A lot of people buy gold when they’re feeling uncertain about the market to safeguard their savings.
How it Correlates with Other Assets
Gold is a great asset to have in your portfolio as it has a low negative correlation across all other major assets. If the value of any shares you own drop, gold prices increase, and the two assets move in opposite directions.
Geo-Political Factors
In times of geopolitical turmoil, gold is often the best performer. In periods of crisis, other assets typically experience more negative activity than gold does because it provides a safe place for your funds.
Gold vs U.S. Dollar
Gold traders need to keep an eye on the US dollar since gold is traded in USD and most assets are correlated. Since they have this inverse correlation, the value of a dollar affects gold as well, implying that they move together. As a currency, the dollar can deteriorate in value. The average person makes more money when the dollar has low value, so prices of goods and services seem more affordable.
Gold Trading Strategies You Should Know About
Whether you want to trade gold or any other type of trading instrument, you can’t make a generalization about how everyone should go about trading it. Every individual has their own preferences and should explore the various avenues available to see what best suits them. Several traders, including those from other markets, have come across great trading strategies that work with other instruments. They work well with gold because of the durable trends this market can form. Trend lines, Fibonacci analysis, and oscillators like RS & Stochastics can all help traders adapt to growth.
Follow the Trend with MAC
To make profit from short-term trends in gold, you could use a moving average crossover strategy. A trader will buy gold when a short-term moving average crosses over a long-term one and sell it when it falls under the longer-term average. Traders may have different preferences for what is the best time frame for two moving averages, but a 10/60 crossover on the one-hour chart would be great for shorter-term trades. Traders have found success trading the middle part of trends in this type of market. Future success is not guaranteed, though.
Follow Real Interest Rates
Long-term traders and investors take the time to look at underlying fundamentals that might impact the gold prices, such as whether it’s worth saving money through investing in gold when real interest rates are low. The correlation between gold prices and the yield is very clear. The lower a country’s real yield, the higher gold prices go up. The conditions for this trade should be in place when the yield is under 1% and when it increases to over 2%. Over time, this relationship between gold and interest rates plays out consistently. For that reason, gold traders have the luxury of looking beyond short-term moves in rates.
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