Ah, that good ol’ yellow metal.
Its luster has been intriguing humanity since the beginning.
Did you know almost the majority of the gold on Earth came from meteors that slammed into the Earth 200 million years ago?
XAU/USD represents one of the most traded assets on the planet, so it’s natural why we are talking about it.
In this guide, we’ll dig deeper into what XAU/USD holds and how you can trade it.
History of XAU/USD
First things first! We have to go back in time and tell you the history of gold and USD.
When gold was originally discovered more than 5,000 years ago, it drew the attention of early men from all across the world. Gold, unlike most metals, typically emerges in nature in its purest form, eliminating the need for refinement.
The fact that gold was not used directly as currency for a long time did not mean that it was not highly valued. On the contrary, the existence or possession of gold went hand in hand with power.
Around 2500 BC, gold jewelry was discovered in the tomb of Djer, a pharaoh of the first Egyptian Dynasty. Tutankhamen’s tomb, which dates from the 14th century BC, housed the world’s biggest found collection of gold and jewelry.
The Gold Standard Act of 1900 made gold the only metal that could be used to redeem paper money.
It ensured that the government would exchange any amount of paper money for gold.
Because the United States owned most of the world’s gold, most countries tied their currencies to the dollar rather than gold. As a result, most countries were no longer required to swap their currencies for bullion, as the dollar had taken its place.
Now let’s talk about the history of USD.
Following the ratification of the US Constitution, Congress passed the Mint Act of April 2, 1792. It created the United States coinage system and the dollar as the primary unit of currency.
Fun fact:During the Nixon administration, the dollar/gold connection was modified to $38 per ounce.
Exchange rate history
Now that you know the history of both XAU and USD, let’s find out their exchange rate history.
Gold’s recent history showed minimal fluctuation until the 1970s when it took off in a protracted upswing following the termination of the gold standard for the dollar, fueled by soaring inflation as a result of exploding crude oil prices.
After peaking at $2,076 per ounce in February 1980, it fell to around $700 in the mid-1980s due to the Federal Reserve’s tightening monetary policies.
The subsequent slump lasted until the late 1990s, when gold began a historic rise that peaked at a high of $1,916 per ounce in February 2012.
Since then, the stock market has lost nearly 700 points in four years, despite a 17 percent increase in the first quarter of 2016, the largest quarterly gain in three decades.
At the time of writing, XAU/USD is trading 1923.8.
XAU in forex
Gold is a form of currency in the FX market. The globally acknowledged gold code is XAU, a symbol used to represent one troy ounce of gold under the ISO 4217 currency standard. It is seen as a safe-haven asset, with its value predicted to rise in times of economic instability.
The central banks of many countries employ gold to keep their currencies stable. Having huge gold reserves in a country’s central bank system is considered as a way to support the value of its currency with a hard asset.
When a currency depreciates, the government may approve a significant gold purchase for the central bank.
These transactions can significantly impact the Gold market since traders notice large quantities being purchased or transferred and so withdrawn from the open market for trading, causing a price shift.
How to trade XAU/USD?
To trade XAU/USD, you need to open an account with the broker, deposit funds, and select XAU/USD as your pair.
If the current quote of XAU/USD is 1925, it indicates that one XAU is worth 1925 USD. We know forex pairs comprise base and quote currencies. So, here, the base currency is XAU, and the quote currency is USD.
Let’s give an example of how you can trade the pair.
Suppose you want to go long (buy) XAU/USD at 1925.20. Then, the market starts trading in your direction, and the XAU/USD rate becomes 1925.25. So, you make a cool five pips.
Now inverse the situation. Let’s say the market doesn’t go in your favor and starts dipping, and the rate becomes 1925.15. In this case, you lost five pips.
Factors affecting XAU/USD
There are a lot of factors that can impact the XAU/USD. Grasping them will help you understand the pair better and make your trading positions accordingly.
Inverse relation
Because gold is denominated in US dollars, its price is often inversely tied to the value of the US dollar. A stronger US currency tends to keep gold prices lower and more under control, whereas a weaker US dollar is more likely to push gold prices higher through increased demand.
As a result, gold is frequently regarded as an inflation hedge. Inflation occurs when prices rise and when the value of the greenback lowers. The price of gold rises in tandem with inflation.
Economic data
Economic data from the United States is another factor that influences gold prices. Jobs reports, salary data, manufacturing statistics, and broader-based data like GDP growth all influence the Federal Reserve’s monetary policy decisions, affecting gold prices.
A better US economy, low unemployment, job growth, manufacturing expansion, and GDP growth of more than 2% tend to push gold prices down, though this isn’t always the case.
FOMC’s decisions
The gold markets are also affected by Federal Reserve statements. The Federal Open Market Committee, which usually meets every six weeks, discusses the health of the US economy and monetary policy’s future.
If the FOMC takes a posture that suggests rates could rise soon, gold prices tend to fall as the opportunity cost of previous interest-bearing assets rises once more.
If the FOMC suggests that rates will remain unchanged, gold prices tend to climb since the potential cost of interest-bearing trading assets for gold remains low.
Inflation
Inflation, or the growing cost of goods and services, is a fourth factor that can influence gold prices. While not a guarantee, growing or greater inflation tends to push gold prices higher, whereas lower or negative inflation or deflation weighs on gold’s value against the dollar.
Inflation is virtually always associated with economic expansion and growth. This is because the Federal Reserve frequently expands the money supply while the economy is developing and expanding.
By increasing the money supply, the value of each existing monetary note in circulation is diluted, making it more expensive to purchase assets regarded as a store of value, such as gold.
XAU/USD correlation
The XAU/USD positively correlates with XAU/CHF, XAU/JPY, and XAU/EUR.
On the flip side, XAU/USD negatively correlates with EUR/GBP, USD/ZAR, and other exotic pairs.
Below you can find a complete list of positive and negative correlations for XAU/USD.
What’s the best time to trade XAU/USD?
The chart below illustrates the best time to trade the XAU/USD during the day.
According to the figures, the price of XAU/USD fluctuates the most on average between Midday and 8 pm London time, roughly corresponding to the hours when US markets are open.
This means that the ideal time to trade the XAU/USD is between Noon and 8 pm London time. This is likely since the major market opening periods fall within this time frame.
Strategies for XAU/USD
XAU/USD gets significant trading volume throughout the trading day. So if you want to trade the pair, you have to come prepared as a trader. Here are some of the strategies you can apply:
Identifying highs and lows
Because the XAU/USD tends to trade in a pattern, one of the simplest strategies is to look for buy or sell opportunities within the trading pair’s historical highs and lows.
For example, when gold is heading higher, you can establish a position and target a previous high as your sell price, or vice versa.
Because gold is a reasonably stable asset, it is likely to return to its former highs or lows in the future.
As a result, this isn’t a suitable day trading strategy because these targets can take a long time to hit, and range-bound methods don’t often give immediate profit opportunities as momentum strategies do.
Nonetheless, it’s a low-risk strategy that profits from consistent XAU/USD price movement.
Crossovers
Because gold prices tend to vary within a range, several moving averages on forex charts will cross over. Many traders will buy when a shorter-term moving average crosses a longer-term moving average.
For long-term traders, a 20-day moving average crossing the price level for the 50-day moving average, for example, would imply a buying opportunity.
If a short-term moving average falls below a longer-term moving average, traders following this method will likely sell to avoid more losses.
Breakout trading
Breakouts, a crucial concept in technical analysis, suggest that the XAU/USD is ready to make a significant move.
As a result, if a pair moves over its resistance level, it is likely to continue on an upward trend. Conversely, it may go on a bear run if it breaks through its support level.
If XAU/USD reaches a support or resistance level many times, it is frequently regarded as stronger. However, these levels have made substantial changes.
What trading style mostly suits XAU/USD?
Now that you know which strategies are suitable for XAU/USD, let’s find out which trading style suits the pair:
News trading
A news trading strategy involves trading before and after a news release based on market forecasts. Because the financial markets may be impacted nearly instantaneously, trading on news announcements may force you to make hasty decisions.
As a result, you’ll have to make quick decisions about how to trade the news.
The price of XAU/USD is heavily affected by the news. So, as a news trader, it’s important to keep track of major news events like elections, political uncertainty, and others.
As a safe haven, the price of gold increases when there’s any uncertainty, so a news trader can go long in these situations.
Day trading
The buying and selling XAU/USD in a short time frame, usually a day, is known as day trading. The idea is to make a small profit on each trade, then compound that profit over time.
To make money, day traders rely primarily on market swings. Therefore, they prefer XAU/USD to fluctuate a lot throughout the day, regardless of the reason: positive or negative news, or simply market emotion.
Gold follows long-term patterns, which appeal to a wide range of traders and offer advantageous day-trading circ*mstances.
Focus on trading with the trend when day trading gold. Wait for a price slowdown and a downturn.
The pause serves as the signal to enter the transaction. When the price breaks out of the pause or consolidation, you can enter the trade and return to the trending direction.
Position trading
Position trading is a common trading method in which a trader holds a position in the XAU/USD for an extended time, usually months or years.
Position traders ignore short-term market swings in favor of identifying and gaining from longer-term trends. This trading style is the most similar to investing, with the key difference being that buy-and-hold investors are only allowed to go long.
Position trading is the most time-consuming of all the trading tactics. As a result, there is both a bigger potential for-profit and a greater inherent risk.
Position trading has several advantages, including less position maintenance, the ability to capitalize on larger trends and reduce market noise.
Final thoughts
So there you have it, now you know everything about the XAU/UD.
If you are looking to trade the pair, it’s important to note that many factors affect XAU/USD. So, it’s key to keep track of all the factors and trade accordingly.
