Gold is one of the most precious metals, having been used as a store of value for centuries. That’s why trading gold has become such a popular way to invest in the commodity market.

However, to thrive in gold trading, you need a solid strategy. Let’s examine three valuable gold trading strategies that you can use to buy and sell gold in financial markets.

This article will also discuss key considerations before trading gold and provide some practical gold trading tips for both beginners and advanced traders.

Fundamental Strategies 

Fundamental trading strategies assess the intrinsic value of gold based on its economic and financial factors.  

1. Seasonal Gold Patterns 

For short-term traders, one of the best fundamental gold trading strategies to follow is seasonal patterns. That’s the beauty of trading gold: it tends to follow a seasonal pattern, rallying during certain months.

During these months, gold prices have been above average. This pattern is primarily driven by demand for gold during the festive seasons. Festivals such as Diwali and Chinese New Year are traditionally associated with buying gold so gold prices tend to rise in the months leading up. Similarly, gold prices may decline in the summer months, when jewellery demand is typically lower.

If you’re looking for the best trading strategy for gold, tracking these seasonal patterns can help you plan entries and exits more effectively.

2. Inverse Gold Prices and US Treasury Rates 

Another fundamental gold trading strategy is to monitor the inverse relationship between gold prices and US Treasury rates.

If you have a long-term trading outlook, using US Treasury rates can be an alternative strategy. These rates usually trigger an inverse response in gold prices, as most traders liquidate their assets to buy treasury bonds.  

So, gold prices tend to move down whenever Treasury rates increase. And whenever the treasury rates decrease, the price of gold increases.  

When interest rates are low, investors may be more inclined to hold onto gold as a store of value. On the other hand, when interest rates are high, investors may be more inclined to invest. In these cases, gold traders would opt for bonds or other fixed-income assets, which offer higher returns.

By monitoring the relationship between gold prices and US Treasury rates, traders can identify potential trading opportunities driven by interest rate fluctuations.

For example, when US Treasury yields rose on Thursday, March 17, 2022, gold prices dropped below $1,946. ^[1]   

Although it hit that price again a few days later, it dropped below the $1925 resistance. 

Technical Strategies 

Experienced traders often use technical analysis strategies to guide their analysis of gold price charts. It requires advanced knowledge of technical analysis tools to identify patterns or trends that can help predict future price movements.

Technical analysts utilise a combination of indicators, including moving averages, the relative strength index (RSI), and the stochastic oscillator, to identify entry and exit points.

To use technical analysis to trade gold CFDs, ensure your strategy matches the current market conditions. Momentum strategies tend to work well in trending markets, while range strategies are more effective in low-volatility markets ^[2][3].

The Moving Average Crossover 

A simple Moving Average (MA) indicator is the average closing price of a traded security, typically calculated over a period of 20 or more days. Gold traders also use the 50-day and 100-day MA. 

So, how does the Moving Average Crossover work? 

It involves plotting two MA of different periods on a price chart and looking for a crossover point where the two lines intersect. Whenever the short-term MA crosses the long-term MA, that’s a signal for a possible long position on a gold trade. Whenever the short-term MA falls below the longer-term MA, that’s a signal for a possible short position. 

Let’s look at an example below. 

For example, you’re in a hypothetical gold position as you use the 100-day MA. 

Whenever the 50-day MA crosses the 100-day MA, you could take a long position on the trade. Once the short-term MA falls below the long-term MA, that signals a possible short position.  

As shown by the MA cross above, gold enjoyed one of the biggest rallies during the 2020 pandemic. ^[4]  

In April 2020, the 50-day MA crossed above the 100-day MA, and prices soared over the next several months until November 2020. In 2020, gold reached highs of up to 25% ^[5]. 

This illustrates why some traders consider the crossover one of the most effective gold trading strategies for capturing long-term trends, although combining it with other gold trading tips can further enhance results.

4 Things to Consider Before Trading Gold CFDs 

Here are four key things you should consider before trading gold: 

1. Find Out What Moves Gold 

Market forces directly affect the price of gold. 

These forces directly affect gold’s trade volumes, trade intensity, and market sentiment. They include: 

• Emotions (Greed and Fear) 
• Supply and Demand 
• Inflation and Deflation 
• Government Policy 

Supply and demand, for example, have played a significant role in determining the price of gold over the past few years. 

According to the World Gold Council, the annual demand for gold rebounded in 2021, recovering from many of the losses incurred during the 2020 pandemic. Due to this sharp increase in demand from institutional investors, the prices of gold bars and coins rose to levels not seen since the second quarter of 2019. ^[6] 

That wasn’t true, however, for every gold instrument. As some shot up, others dropped. Take Gold ETFs, for instance. An increase in interest rates and inflation across Western markets made it expensive to hold them, leading to an outflow of capital from Gold ETFs into other assets.   

Failure to understand these forces can expose you to massive market risk as a retail trader.  That happens when you trade on one sentiment when, in fact, another controls the market.  

2. Understand the Market Participants 

Gold attracts multiple market participants, each with opposing interests. In other words, everyone in the gold markets has their reasons for participating. Understanding these interests can help you determine how to trade gold and which gold instrument to choose. 

Most times, ‘gold bugs’, or investors with a bullish outlook on gold, are at the top of the pyramid. These investors purchase actual gold bullion and other gold assets. Gold bugs traditionally hold long positions, sometimes perpetually, and are rarely shaken by downtrends. ^[7]

Although their actions displace shorter-term market players, gold bugs create enormous market liquidity and provide opportunities for others to exit their gold stocks and futures positions.

Gold also serves as an excellent hedging instrument, and most institutional investors employ risk-on and risk-off strategies, particularly in markets with lower retail trader participation. 

3. Observe for Long-Term Gold Trends 

Gold has a rich history. Take the time to review historical gold charts and understand its behaviour over the past century.  

Trend watching can also help you identify patterns that gold has followed over recent decades. This can be a valuable step in narrowing down your best trading strategy for gold or finding the right mix of technical and fundamental signals.

4. Choose Where to Trade 

Once you understand these three factors, you can choose where to trade. Doing this gives you the opportunity to select a gold CFD instrument to trade and plan your entry and exit points. 

At the same time, liquidity tends to follow gold trends, especially during periods of upward or downward movement. Markets with lesser participation are less liquid and have much lower participation rates. Often, they’ll charge you higher trading costs through slippage. 

Applying these insights to your gold trading strategies can help you avoid common mistakes and refine your overall approach.

Conclusion 

Trading gold requires patience, discipline, and a long-term outlook. Although there are numerous gold trading strategies, consider starting with these three first.

To recap briefly, fundamental strategies help analyse market statuses. While a technical strategy enables you to time your entry and exit out of any gold positions.  

Regardless of the strategy you prefer, it’s essential to consider market forces, risk management, and your personal financial goals before trading gold. And remember, past performance is not an indication of future results. 

Choose the right plan that fits your trading style, combine it with sound gold trading tips, and you’ll be better positioned to discover the best way to trade gold for your personal goals.

Frequently Asked Questions

How to trade gold without loss?

There’s no guaranteed way to trade gold without losses. However, using stop-loss orders, proper risk management, and diversifying your positions can help minimise risks.

What is the best way to trade in gold?

There isn’t a single “best” way for everyone. Many traders combine gold trading strategies, technical analysis, and risk management to build an approach that suits their goals.

References