The gold market is often seen as a safe haven during economic uncertainty.
Gold prices reached a two-week peak on September 19 as the US dollar relinquished its hold on recent six-month highs. Following the anticipated US central bank meetings (FOMC), the US Federal Reserve moved to stall interest rate hikes. This has seen the gold price drop down to $19,30.
In this article, we’ll examine what affects the gold price in 2023 and share valuable information for all traders.
Commodity Trading – Gold price soars, drops after FOMC meeting
On September 21 spot gold remained stable at $1,932.32 per ounce, having attained its highest level since September 5 earlier in the trading session. Meanwhile, US gold futures showed no significant change, remaining at $1,953.90.
The US dollar experienced a minor 0.1% decline against its counterparts, rendering gold more affordable for international buyers, just ahead of central bank policy determinations from the US, Britain, and Japan over the course of the week.
The appeal of non-interest-bearing gold may diminish if the Federal Reserve decides to further increase interest rates to combat inflation.
The Fed meeting takes place amid new potential risks to the best-case scenario of curbing inflation without causing a recession, including a strike by auto workers, the possibility of a federal government shutdown, and mounting pressure from student loan burdens on consumers.
In the realm of other metals, spot silver dipped by 0.3% to $23.16 per ounce, platinum experienced a slight 0.4% decline to $929.49, while palladium saw a modest 0.8% increase, reaching $1,246.21.
Commodity Trading – Gold holds its value
Between March 8 and April 24, gold exhibited a robust rally of over 9%, surpassing the S&P 500, which managed a modest increase of just over 3% during the same period. This rally appeared to align with news of banking stress, which had the potential to influence the Federal Reserve’s approach to interest rate hikes.
For nearly a year, the US Treasury yield curve has maintained an inverted shape, leading many analysts to speculate that the US economy might be heading toward a recession.
These and other factors have significantly heightened interest in the gold market, resulting in record-breaking trading volume for options on gold futures in 2023. Gold is often seen as a safe haven during times of economic turmoil.
But does it truly perform well in such circumstances? To answer this question, let’s examine historical data to understand how gold behaves in three scenarios: inflation, recession, and stagflation.
Is Gold an Inflation Hedge?
Generally, yes but the reality is more complex. The last major episode of inflation in the U.S. occurred between 1973 and 1979 when inflation averaged approximately 8.8% per year. During this period, gold delivered an impressive annual return of 35%.
The 2021 inflation was primarily driven by government spending, supply chain disruptions, and persistently low-interest rates. In March 2021, the Consumer Price Index (CPI) showed a significant year-over-year increase of 2.62%, with gold trading around $1,700 per ounce.
In the following months, both gold and inflation continued to rise, with the CPI peaking at 9.06% in July 2022 and gold reaching its cycle high near $2,050 in March 2022.
Over the seven months following gold’s peak, it experienced a 20% decline, hitting a low of $1,625 in October 2022. Interestingly, this decline coincided with the onset of one of the Federal Reserve’s most aggressive and well-telegraphed interest rate hike cycles in history. Predictably, the U.S. dollar strengthened, causing gold to lose value.
It wasn’t until October that the market began to anticipate a reduction in interest rates, shifting gold’s focus from the current high-interest rate environment to expectations of future rate cuts aimed at countering a potential recession.
In summary, gold tends to benefit from inflation but less so when the Fed adopts a decisive stance against it. In simpler terms, gold appreciates in value during inflationary periods but dislikes higher interest rates and a stronger US dollar that the Federal Reserve might implement to combat inflation.
Commodity Trading – Does Gold Perform Well During a Recession?
From six months before the start of a recession to six months after its end, gold rallied by an average of 28% and outperformed the S&P 500 by 37%. This outperformance appears to be more closely related to the Federal Reserve and the federal government’s response to the recession than the recession itself.
As the economy contracts, the Fed typically responds by cutting interest rates and injecting liquidity, while the government engages in Keynesian-style increased borrowing and spending. Gold benefits from low-interest rates as they reduce the opportunity costs of holding gold.
Additionally, gold thrives in an environment where the money supply increases, especially when the underlying economy struggles, making investing in economically sensitive stocks less appealing. The Great Financial Crisis of 2008 serves as a prime example.
The Federal Reserve slashed the funds rate from 4.75% in late 2007 to nearly 0% by 2009 and maintained near-zero rates for the following six years. During this period, gold prices surged by almost 50%.
Commodity Trading – How Does Gold Perform During ‘Stagflation’?
Stagflation, characterized by stagnant economic growth, high inflation, and elevated unemployment, was most prominent in the mid to late 1970s, driven by soaring oil prices that fueled inflation and hindered overall economic growth. OPEC’s oil embargo propelled crude oil prices from $25 per barrel in 1973 to $144 by 1980.
High crude oil prices had a significant negative impact on economic activity. A stagnant economy prompted the Federal Reserve to implement stimulus measures and led to increased government fiscal intervention. Under normal circumstances, these actions would benefit individual companies and boost their stock prices by reducing borrowing costs.
However, during stagflation, investors lacked confidence in the effectiveness of these measures, as companies struggled to maintain profitability.
Consequently, the liquidity injected into the system often steered away from traditional company stocks, favoring alternative assets like gold. Stagflation generates economic uncertainty because it disrupts the traditional relationship between inflation and unemployment.
Historically, gold has thrived in periods of economic uncertainty.
Commodity Trading – How to trade gold
Commodity trading, especially in precious metals like gold, offers a unique opportunity for traders to diversify their portfolios and potentially profit from market fluctuations. Gold, often considered a safe-haven asset, attracts traders seeking stability in uncertain times.
In this beginner’s guide, we’ll explore how to trade gold, what factors influence its price, provide a practical example of a gold trade, and introduce you to trading gold via Contracts for Difference (CFDs) with CMTrading, a trusted broker and regulated broker.
Understanding What Affects the Price of Gold
Before diving into gold trading, it’s essential to understand the factors that influence its price:
Supply and Demand: Like any other commodity, the price of gold is significantly influenced by supply and demand dynamics. Factors such as mining production, central bank gold reserves, and jewelry demand can impact the balance.
Geopolitical Events: Gold often thrives during geopolitical uncertainties, such as conflicts, trade disputes, or political instability. Traders turn to gold as a safe haven during times of crisis.
Inflation and Interest Rates: Gold can act as an inflation hedge. When central banks lower interest rates or implement quantitative easing, the opportunity cost of holding gold decreases, making it more appealing to investors.
Currency Movements: Gold is priced in U.S. dollars, so fluctuations in currency values can affect its price. A weaker dollar typically drives gold prices higher.
Market Sentiment: Investor sentiment plays a significant role in gold prices. Positive sentiment can boost demand, while negative sentiment can lead to selling.
Technical Analysis: Traders often use technical indicators and chart patterns to make trading decisions, identifying potential entry and exit points.
A Practical Example of How to Trade Gold
Now, let’s walk through a basic example of how to trade gold:
Step 1: Research and Analysis
Begin by conducting thorough research on the gold market. Analyze news, charts, and economic indicators to identify potential trends.
Use technical analysis tools like moving averages, Relative Strength Index (RSI), and Fibonacci retracements to assess the market.
Step 2: Choose Your Trading Platform
Sign up with a reputable broker that offers access to gold trading. For this guide, we recommend CMTrading, a trusted broker in commodity trading.
Step 3: Decide on Your Trading Strategy
Determine whether you want to buy (go long) or sell (go short) gold based on your analysis.
Set a clear trading plan with entry and exit points, stop-loss orders, and take-profit levels to manage your risk.
Step 4: Execute Your Trade
Use your chosen trading platform to place your order. Specify the amount you want to trade and the type of order (market or limit).
Confirm your trade, and it will be executed according to your instructions.
Step 5: Monitor Your Trade
Keep a close eye on your gold trade. Monitor market developments, news, and technical indicators to decide if you should adjust your position.
Step 6: Close Your Trade
When your trade reaches your predetermined take-profit or stop-loss levels, or when your analysis suggests it’s time to exit, close your position.
Trading Gold via CFDs with CMTrading
Contracts for Difference (CFDs) allow traders to speculate on the price movements of gold without owning the physical asset.
Here’s how to trade gold via CFDs with CMTrading:
- Sign Up: Create an account with CMTrading, a reputable broker offering a wide range of CFDs, including gold.
- Deposit Funds: Deposit funds into your trading account using various payment methods.
- Access the Trading Platform: Log in to your CMTrading account and access the trading platform.
- Search for Gold (XAU/USD): Locate gold among the available CFDs on the platform, often listed as XAU/USD, representing the price of gold against the U.S. dollar.
- Choose Your Position: Decide whether to go long (buy) or go short (sell) based on your analysis.
- Set Your Parameters: Specify the trade size, stop-loss, and take-profit levels. CMTrading’s platform provides intuitive tools for these settings.
- Execute Your Trade: Confirm your trade, and your gold CFD position will be opened.
- Monitor and Manage: Keep a close watch on your trade using the platform’s real-time charts and analytics. You can adjust your position or close it when it aligns with your trading plan.
Commodity trading – Why trade with CMTrading?
- Awards and Recognitions:
CM Trading has received several awards and recognitions in the industry, which can be seen as a positive sign of its reputation. Awards may include acknowledgments for customer service, platform features, and educational resources. However, it’s important to keep in mind that awards are just one factor to consider when evaluating a broker.
Ensure that the broker you choose is regulated by a reputable financial authority. Regulatory bodies help ensure the broker complies with industry standards and safeguards client funds. CM Trading is regulated by the Financial Sector Conduct Authority (FSCA) in South Africa.
- Account Types and Fees:
Review the account types offered by CM Trading and their associated fees, spreads, and commissions. Ensure that the broker’s fee structure aligns with your trading preferences and financial goals.
- Trading Platforms:
CM Trading provides access to trading platforms such as MetaTrader 4 (MT4). Check if these platforms are compatible with your trading style and if they offer the tools and features you need.
- Customer Support and Education:
Evaluate the broker’s customer support services and educational resources. A reputable broker should offer responsive customer support and educational materials to help traders improve their skills.
- Reviews and Reputation:
Search for reviews and testimonials from other traders who have used CM Trading. This can provide insights into the broker’s performance and customer satisfaction.
Tips for Avoiding Scam Brokers Online:
To avoid falling victim to fraudulent brokers online, consider the following tips:
- Regulatory Compliance:
Verify that the broker is regulated by a recognized financial authority in its home country. Regulatory information should be readily available on the broker’s website.
- Research and Reviews:
Conduct thorough research by reading reviews and seeking feedback from other traders. Look for both positive and negative experiences.
Ensure the broker provides clear and transparent information about its services, fees, and trading conditions. Be cautious of brokers with vague or inconsistent information.
- Secure Website:
Check for a secure website with an “https” URL and a padlock icon in the address bar. This indicates that the broker takes security seriously.
- Customer Support:
Test the responsiveness of the broker’s customer support team by asking questions or seeking assistance before opening an account.
- Avoid Unrealistic Promises:
Be wary of brokers promising guaranteed profits or using high-pressure sales tactics. No legitimate broker can guarantee profits.
- Withdrawal Process:
Understand the broker’s withdrawal process and ensure it is straightforward and reliable. Scam brokers may make it difficult for traders to withdraw funds.