Have you contracted the gold bug yet?
During every economic downturn, inflationary environment, or global event, investors develop a lust for the yellow metal, be it physical bullion or mining stocks.
Like every other asset class, professional investors use a trading strategy when investing in the gold market and locating the best gold trading brokers.
Indeed, gold technical analysis is critical to buying and selling the precious metal. So, what type of indicators should you monitor, and what kind of signals should you be on the prowl for during each session?
Let's make like gold and shine a light on this asset.
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Why Should You Trade Gold?
In a world desperate for yield, should you even hold gold?
Opinions vary among financial analysts, but it is typically recommended that precious metals should represent about 10 percent of your overall portfolio.
Investors can depend on the safety and security of gold during times of upheaval and chaos, whether it is in the global financial markets or the rest of the world.
While a stronger greenback would, in theory, impact dollar-denominated metal commodities, gold's appeal is in its inherent value. Not only is it an investment tool, but it also possesses many uses—it is a key component in automobiles and computers.
Meanwhile, you could even generate a yield while owning gold by taking advantage of the Gold Forward Offer Rate (GOFO). This is an interest swap rate for a gold-to-dollar exchange.
Indicators to Note When Gold Trading
When trying to select a single technical indicator, it can be a challenging feat as there are so many to choose from in the gold market.
Let's take a look at a few:
Momentum
Momentum trading is a simple enough tactic employed by traders. You monitor the velocity of price movements and enter a trade as it picks up some steam. With this strategy, you are more focused on the speed and size of price changes rather than the actual price.
Relative Strength Indicator (RSI)
Another technical indicator you can utilize, even for forex gold signals, is the relative strength indicator (RSI). This essentially conveys if an asset is oversold or undervalued.
Put simply, an RSI reading of 30 or below shows if the security is in a state of being oversold. However, in an upward trend, which is what you want when trading, the RSI will stay above 30 and routinely touch 70.
Gold Market Indicator
Every week, the Commodity Futures Trading Commission (CFTC) publishes its Commitments of Traders report, which breaks down the open interest for futures and options on futures markets among hedge funds and money managers. The report highlights if the financial markets are net buyers or net sellers of gold and other commodities (wheat, soybeans, and silver, for example).
Here is how to access the data:
- Visit CFTC.gov
- Hit "Market Reports"
- Choose "Commitments of Traders"
- View the COT reports and filter the data based on what you want
If you want a complementary resource as well, you can also integrate the Daily Sentiment Index (DSI) into your gold trading strategy. It is a reliable short-term mechanism that gauges the temperature of gold markets by spotlighting the percentage of traders going long and short.
This can also add to your scalping strategy by determining if there is a shift in sentiment unfolding in real-time.
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Important Indicators of Gold Fundamentals
The first couple of months of trading in 2022 have been quite interesting, especially in relation to gold, the greenback, and U.S. Treasurys.
Indeed, many factors in the broader financial markets can contribute to gold prices, but it is not guaranteed they will have the impact they generally possess.
US Treasury yields have been soaring this year, with investors pouring into bonds amid rising interest rates. The buck has also held steady since traders are seeking shelter in traditional safe-haven instruments.
Gold is generally sensitive to a rising-rate environment because it lifts the opportunity cost of holding non-yielding bullion. A stronger greenback is also bearish for commodities priced in dollars because it makes it more expensive for foreign investors to purchase.
However, what is fascinating is that gold is having a terrific start to 2022, despite these alternatives rising.
Meanwhile, inflation is through the roof in most advanced economies, particularly in the United States, where the consumer price index (CPI) is at a 40-year high of 7.5%. The producer price index (PPI) and the personal consumption expenditure (PCE) price index are also at multi-decade highs.
When inflation runs hot, investors try to find investment vehicles that shield their net worth and protect their purchasing power. Gold—and any tangible asset for that matter—has historically been the product consumers purchase.
Is Trading Gold Worth It?
There is a joke among the metal bulls that gold is in a 5,000-year-old bubble.
In the end, with thousands of financial products to choose from in the global marketplace, is gold an antiquated asset, or does it still provide value to the public?
Put simply, with enough expertise, the best time to trade gold, and an understanding of how gold technical analysis works—or even why gold is a critical asset—you can feel confident in owning a gold ETF or physical coinage and bars.
Gold does not erode; the precious metal maintains its value over the long term. And, in a world where monetary expansion has been astronomical, gold does not depend on other currencies to remain a valuable resource.
Gold is certainly a worthwhile investment to hold for the rest of your life
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