intro – gold price:
Gold is a timeless asset which has been considered valuable throughout history, across all civilisations and humanity has always speculated on gold price. Chemically, gold is the most uninteresting element. It is one of the least reactive chemical elements and is solid under standard conditions. It has therefore been used for coinage, jewellery and art throughout history.
Today, world consumption of new gold produced is about 50% in jewelry, 40% in investments, and 10% in industry. This creates demand for gold and therefore impacts the gold price. The price of gold is determined through trading in the gold and derivatives markets, but a procedure known as the gold fixing in London, originating in September 1919, provides a daily benchmark price to the industry. The afternoon fixing was introduced in 1968 to provide a gold price when US markets are open.
a detour back in time
As per recorded history, in 2600 B.C. ancient Mesopotamians produced first gold jewelry. Then, gold was used for a variety of aesthetic and decorative uses – both as adornment for humans and structures alike. In 1223 B.C. in Egypt, the Tutankhamen’s tomb was constructed primarily of gold.
The first gold coins were used from 700 B.C.. Standardized gold and silver coins would eventually become currency and replace barter arrangements. Hence, making trading in the ancient world much easier, by using a common gold standard. For instance, if 1 coin of tribe A weighs 100g and 1 coin of tribe B weighs 200g, then you can exchange 1 coin of tribe B for 2 coins of tribe A.
Due to rarity of gold, sometime in the middle ages, nation states started using other metal coins(and alloys) as legal tender. However, one could exchange these coins for gold or silver, thus setting a gold standard. This gold standard, especially for reserve currencies continued into the 20th century.
US, then revised the gold standard after the economic crisis of 1930s. This was the first step in ending the relationship altogether. In 1971, the gold standard was replaced with national debt. Other major world currencies followed and fiat currency became the norm. Thereafter, gold became a tradable commodity and it’s price was determined by the forces of demand and supply in the commodities market.
gold price: trading
Gold markets are very liquid. Therefore, gold price fluctuation in the markets creates opportunities for traders/investors to profit through speculation. Market participants have many options. For example, you can buy physical gold outright and store it in bank safety deposit or at home. You can also speculate on gold price through mining companies shares, ETF’s or gold futures and options.
These instruments offer the option to use leverage and therefore the ability to gain a high exposure to gold price movements. Gold markets have been around for almost a 100 years. But, trading as a commodity really took off, after 1971, when US free floated USD and removed the gold standard. In the next section, we will look at the risk factors that impact gold price to help you forecast future gold price.
variables and factors that impact gold price
dollar(USD) rate in fx markets
Firstly, as USD appreciates in value, this causes a drop in demand for gold. This is because there is sell side pressure from investors who hold gold, to exchange it for now valuable USD. There is a consistent demand for gold from funds that hold gold, so they have willing buyers. However, buy side pressure from new buyers falls. This is because investors do not want to convert their (non dollar denominated) investments into USD, as they will get less dollars per their domestic currency.
Secondly, higher inflation means depreciation in the value of USD and that implies a rising demand for gold. This is because investors will use cheap dollars to buy up more gold. Thereby, creating extra buy side pressure. In addition, the current investors will be unwilling to sell their gold stock as they will get less USD. Therefore, higher inflation in the US tends to push up gold prices.
Thirdly, short and medium term interest rates spike will impact the gold price. We should expect the gold price to fall in this scenario. This is because higher rates will mean a (relatively)risk free alternative to gold – a more risky asset. However, longer term high rates will lower bond yields and therefore, the large investors’ money will move to stocks and gold, causing gold prices to spike. This is because gold is a less riskier alternative to stocks. (Gold price is never expected to go to zero, while stock prices can)
and the rest
Finally, other factors such as recession or market panic impacts gold price. People have always seen gold as a safe haven during times of economic uncertainty. So, gold prices goes up during recessions or periods of economic uncertainty.
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading gold
STOKAI provides daily prediction using algorithms based on all factors that impact Gold price and evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial. If there are any issues, please contact our customer services team.
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.