Gold Trading Techniques You Can Use in 2024

Few things capture the imagination like gold. The precious metal is a valuable commodity that is highly traded, a natural resource with myriad industrial and commercial applications, a store-of-value and medium-of-exchange, and once a backer of currency during a pivotal moment in global financial history.

More importantly, gold has remained a popular asset class for investors offering unique characteristics. Its reputation as a safe haven asset means investors tend to flock into gold during market uncertainty, while its low correlation to equities and other asset classes help it stand out as an effective portfolio diversifier.

If you’re keen to explore investing in gold, read on to learn essential tips and considerations when dealing with this unique asset class.

Key Points

• Monitor real interest rates as rising rates can cause gold prices to fall, presenting buying opportunities or moments to initiate short trades.

• Use ratios like the gold stocks to gold ratio and gold vs bonds ratio to predict market trends and make informed trading decisions.

• Analyse gold prices across different time frames to ensure the reliability of trading strategies, acknowledging that longer time frames provide stronger support and resistance levels.

1. Pay Attention to Real Interest Rates

Gold is often regarded as a safe investment, due to its proven track record in holding its value. Likewise, bonds are generally considered lower-risk investments because they are backed by the creditworthiness of issuers.

As such, investors seeking to avoid short-term stock market volatility may choose to rotate into gold or bonds. Unlike bonds however, gold does not provide a yield. Hence, when nominal interest rates outpace inflation, investors sell their gold holdings and buy bonds instead, so as to capitalise on the passive income provided by bonds. 

Thus, gold investors should pay attention when real interest rates rise faster than inflation. This is when gold may experience a selloff, providing a buying opportunity, or an occasion to open a short trade. 

2. Analyse Ratios

There are certain ratios that can reliably indicate incoming trends in gold prices. Here are two widely-referenced ones. 

Gold Stocks to Gold Ratio ^[1,2]

The gold stocks to gold ratio has historically been a leading predictor of the gold markets. This ratio is derived by dividing the stock price of gold mining companies by the price of gold per ounce. A higher ratio indicates that mining stocks are valued more highly than gold, while a lower ratio indicates that gold is valued more highly. 

During periods of stable economic growth, the gold stock to gold ratio tends to tilt in favour of gold mining companies, as increased profit margins foster higher share prices, providing a better rate of return. This causes gold investors to rotate from gold into gold mining companies instead. 

Conversely, during periods of economic decline, gold tends to come back into favour among investors due to its “safe haven” reputation. This is represented by lowered readings in the gold stock to gold ratio. 

However, it should be noted that gold mining stocks have not caught up with gold prices, due to several reasons. Hence, investors should confirm with other data or indicators instead of solely relying on the gold stocks to gold ratio. 

Gold vs Bonds Ratio ^[3] 

As mentioned earlier, both gold and bonds are often perceived as safe haven assets due to their historical track record in preserving value and lower-risk characteristics respectively. Major movements in one asset class can sometimes reflect similar shifts in market sentiment affecting the other. 

Specifically, when a major top or bottom forms in the gold vs bonds ratio, they are usually reflected in corresponding tops and bottoms in the price of gold. As such, investors can take such events in the gold vs bond ratio as confirmation, providing a basis for a trading decision. 

3. Analyse Using Different Time Frames

This tip applies to trading in general, and not just when trading in the gold market. 

While you may have a preference for gold price trading strategies involving a certain time frame, don’t forget to analyse your trade using other time frames as well. This is because gold price trends that look promising over a short time frame may be disrupted by longer-term trends. 

Taking a leaf from trend trading, in general, the longer the time frame, the stronger the support and resistance levels. Hence, having a habit of zooming out when planning short-term trades can be helpful in confirming or denying your strategy, allowing you to correct course or optimise your trade.

4. Not All Techniques Work ^[4,5]  

When studying gold price trends, you may have come across highly technical indicators or jargon with fanciful names. These are common in technical analysis, but should be applied with the proper understanding. 

For instance, there is usually much excitement when a “golden cross” or “death cross” is forming on the charts. (A gold cross is when a shorter moving average crosses above a longer moving average – this is usually read as a bullish sign. A death cross is when a shorter moving average crosses below a longer moving average, usually taken as a bearish signal).

However, historical market data reveals that both of these indicators rarely amount to much when it comes to gold.

The takeaway here is to backtest gold price techniques before applying them to a live trade. Techniques that have never been seen to work are better left out of your toolkit. 

5. Look for Outliers

The gold market isn’t immune to volatility, but it is far tamer than other asset classes, such as equities or cryptocurrency. Hence, outliers should not be ignored; rather, if you spot unusual spikes or drops that are outside of expected bounds, you should attempt to find out the cause behind it. 

Then, try to find out whether something similar had happened before, and watch out for the next event that’s supposed to happen in sequence. The idea is to watch for patterns and see if a trend that happened before is happening again. If the signs indicate that the same price pattern is forming, it may be beneficial to trade it. 

6. Observe Inflows and Outflows of Popular Gold ETFs

One way to keep an eye on gold prices is to observe the inflows and outflows of popular gold ETFs, such as SPDR Gold Shares (GLD),iShares Gold Trust (IAU), SPDR Gold MiniShare (GLDM) and Sprott Gold Miners (SGDM).

When such ETFs report a sudden spike in subscription (i.e., there’s a sudden influx of investor funds) this could be a sign that the market has reached an overbought state. This is commonly followed by a retraction as earlier investors take some profits, causing downward pressure on gold price. 

Similarly, if there is a high level of outflows from popular gold ETFs, it might indicate a shift in investor sentiment that warrants a deeper investigation. 

7. Monitor Market Sentiment

Taking the previous tip further, it’s often worth paying attention to investor sentiment regarding other precious metals when trading the gold market. 

If the majority of investors and traders are bullish about other precious metals, gold prices are likely to be reaching a top. Investors should check for more complementary signals to confirm a trend reversal is indeed upcoming, and make preparations for appropriate trades. 

Conversely, if precious metals traders and analysts are generally bearish, this could mean gold prices are close to the bottom, or the bottom has already been reached. Once again, watch for confirmation, and if found, make the necessary preparations. 

With Vantage, traders can leverage Client Sentiment Analysis to gauge market consensus and identify buying or selling opportunities based on prevailing trends.

8. Choose the Right Broker

Partnering with the right brokerage is essential if you want to optimise your gold trading outcomes. This is because a top-notch broker will support you with a rich array of educational resources and news alerts so you can better grasp gold market trends. 

You will also benefit from access to advanced charting tools to plan your strategies, and powerful online trading platforms to execute your trade without undue delays. Importantly, the right online broker provides low fees and transparent pricing structure so you never have to deal with hidden fees or worry about being overcharged. 

All these and more await you as a Vantage trader, as our mission is to empower traders throughout their trading journey, from the very first step. 

Trade gold in both bear and bull markets with Vantage Gold CFDs, and enjoy tight spreads, low fees and flexible lot sizes starting from 0.1 lot. Sign up for an account today.

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