Trading Market Outlook; Litecoin, The Dollar, Gold

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Contents

Trading Market Outlook; Litecoin, The Dollar, Gold

It’s A Good Week For Trading

The charts are pointing to a good week for trading, depending on what you trading and how you trade it of course. What I mean is that it looks like markets from crypto to currency to commodities and equities are on the move. The charts are set up for some text book movements that could become quite large. Some are driven by the Wuhan Virus outbreak but not many. In most cases the virus is an excuse to sell or buy a market already wound up so there are underlying forces at play.

The Cryptocurrency Market

The broad cryptocurrency market has been in rally mode since mid-December. After hitting a peak early this month the market retreat to test support and support has confirmed. Just this weekend coins ranging from Litcoin to Bitcoin and even Ethereum bounced from their short-term EMA’s and began to move higher. Technically speaking, this move confirms the uptrend that began at the end of last year and suggest upward price pressure will continue. Litecoin has been leading the market and continues to do so now. The indicators are still weak but have begun to roll over in what could become a very bullish signal. Stochastic is already showing a weak bullish crossover, if LTC/USD moves up to set a new near-term high the MACD will follow. The target, upon breaking to new highs, is then $66 and $80.

The Dollar Index Is Edging Higher

The Dollar Index is edging higher on a number of underlying factors including U.S. economic health and the Wuhan Virus. The Dollar is supported by the stability of the U.S. economy relative to the world during the trade war, the virus is adding a little updraft with flight-to-safety trading. The indicators are bullish so I would expect to see price action continue to drift higher. The risk is in this week’s central bank meetings which includes the FOMC. The FOMC is not expected to alter policy or even the statement, they’ve returned to “wait and see” mode, so any variation from expectations could be market-moving.

Gold Shines But Resistance Is Capping Gains

Gold prices are edging higher and look bullish. The technical set up is near-perfect with both indicators showing solid buy-signals. The risk is in the resistance. Resistance is at the previous high and capping gains, at least for now. It looks like Gold will test $1,560 but that’s not certain. What is certain is the metal will have to post a solid break above that level, hold it, and close above it for me to be more than casually bullish. That may happen with the FOMC meeting, maybe with the virus, but we’ll have to wait and see. Until then I expect to see some bearish candles start to form.

Gold Outlook 2020

Risk appetite amid high uncertainty

As we look ahead, we expect that the interplay between market risk and economic growth will drive gold demand in 2020. In particular, we focus our attention to:

financial uncertainty and lower interest rates

weakening in global economic growth

gold price volatility.

In our new gold market outlook, we also explore the performance of gold implied by Qaurum SM , our innovative valuation tool, across various hypothetical macroeconomic scenarios.

Gold shone in 2020

Gold had its best performance since 2020, rising by 18.4% in US dollar terms last year. It also outperformed major global bond and emerging market stock benchmarks in the same period (Chart 1). In addition, gold prices reached record highs in most major currencies except the US dollar and Swiss franc (see Table 2 in the Appendix).

Gold prices rose most between early June and early September as uncertainty increased and interest rates fell. But investors’ appetite for gold was apparent throughout the year, as seen by strong flows into gold-backed ETFs, growing gold reserves from central banks, and an increase in COMEX net longs positioning.

Gold Outlook Chart 1: Gold outperformed bonds and EM stocks

Chart 1: Gold outperformed bonds and EM stocks

Annual performance of major global assets *

Sources: Bloomberg, ICE Benchmark Administration, World Gold Council; Disclaimer

*As of 31 December 2020. Annual returns based on the LBMA Gold Price, Bloomberg Barclays US Treasury Index and Global Treasury Index ex US, ICE BAML US 3-month Tbill Index, Bloomberg Barclays US Corporate and High Yield Indices, MSCI EM Index, Bloomberg Commodity TR Index, MSCI EAFE Index, S&P 500 Indices, and Bloomberg Oil TR Index.

High risks and low rates on the horizon

We expect that many of the global dynamics seeded over the past few years will remain generally supportive for gold in 2020.

In particular, we believe that:

  • Financial and geopolitical uncertainty combined with low interest rates will likely bolster gold investment demand
  • Net gold purchases by central banks will likely remain robust even if they are lower than the record highs seen in recent quarters
  • Momentum and speculative positioning may keep gold price volatility elevated
  • And while gold price volatility and expectations of weaker economic growth may result in softer consumer demand near term, structural economic reforms in India and China will support demand in the long term.

Read the full commentary, analysis, and see hypothetical forecasts for gold performance in 2020 as implied by Qaurum based on a range of maco-economic scenarios developed by Oxford Economics in our new outlook, or try Qaurum to customise your own scenarios.

Gold Outlook 2020 Focus: A supportive environment for gold investment

Gold has historically performed well in the 12 to 24 month period following policy shifts from tightening to “on-hold” or “easing” – the environment in which we currently find ourselves. And, historically, when real rates have been negative, gold’s average monthly returns have been twice as high as the long-term average (Table 1). Even slightly positive real interest rates may not push gold prices down. Effectively, our analysis shows that it has only been in periods with significantly higher real interest rates – an unlikely outcome given the current market conditions – that gold returns have been negative.

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Gold Outlook Table 1: Gold performance nearly doubles in periods of negative interest rates

Gold performance in various real rate environments*

Long term
average
Low ( 2.5%)
Monthly Return 0.6% 1.2% 1.0% 0.3%
Standard Error 0.2% 0.4% 0.4% 0.3%
Different from 0? Yes Yes Yes No

*Based on nominal gold returns between January 1971 and September 2020. Real rate regimes based on the 12-month constant maturity US T-bill minus the corresponding y-o-y CPI inflation. Difference from zero computed as a two-way T test at a 5% significance level.

Source: Bureau of Labour Statistics, Federal Reserve, ICE Benchmark Administration, World Gold Council

Download the Gold Market Outlook for 2020

Qaurum: Your gateway to understanding gold’s performance

New on Goldhub for 2020 is Qaurum: a web-based quantitative tool that helps investors intuitively understand the drivers of gold performance.

Qaurum allow investors to assess how gold may react across different economic environments in three easy steps:

  • Select a hypothetical macroeconomic scenario provided by Oxford Economics, a leader in global forecasting and quantitative analysis, or customise your own
  • Generate forecasts of gold demand and supply and view the impact of key macro drivers
  • Calculate and visualise implied returns for gold

By using Qaurum, investors can calculate how various macroeconomic and geopolitical environments might impact the implied performance of gold over the next five years for as well as long-term 30-year returns.

Behind its user-friendly interface, Qaurum is powered by the Gold Valuation Framework (GVF). An academically validated methodology, GVF is based on the principle that the price of gold and its performance can be reliably explained by the interaction of demand and supply.

Register now to use our brand new tool.

Discover Qaurum

Copyright and other rights

© 2020 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.

All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other third-party content is the intellectual property of the respective third party and all rights are reserved to them. Metals Focus is an affiliate of World Gold Council

Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below.

The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus or other identified third-party source, as their source.

World Gold Council does not guarantee the accuracy or completeness of any information. World Gold Council does not accept responsibility for any losses or damages arising directly or indirectly from the use of this information.

This information is not a recommendation or an offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.

This information contains forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. We assume no responsibility for updating any forward-looking statements.

How to Trade Gold: Top Gold Trading Strategies and Tips

Gold trading strategy:

  • Trading gold is much like trading forex if you use a spread-betting platform
  • A gold trading strategy can include a mix of fundamental, sentimental, or technical analysis
  • Advanced gold traders recognize that the yellow metal is priced in US Dollars and will account for its trend in their gold analysis

Why trade gold and what are the main trading strategies?

Once upon a time, trading gold was difficult: you had to buy and sell the metal itself. Then came futures and options, allowing traders to take positions without actually ending up with a safe full of bars, coins or jewelry. Gold exchange-traded funds (ETFs) made it easier still; trading gold was much like trading a stock.

Today, trading gold is almost no different from trading foreign exchange.

If a retail investor uses a spread-betting platform it is simply a matter of buying or selling depending on whether you think that the gold price is likely to rise or fall.

For some people, trading gold is attractive simply because the underlying asset is physical rather than a number in a bank account. There are a variety of strategies for trading gold ranging from studying the fundamental factors affecting supply and demand, studying current positioning of gold traders, to technical analysis and studying the gold price chart .

Even for those who rely principally on the fundamentals , many experienced traders would agree that a better gold trading strategy is incorpor ating some components of fundamental, sentiment, and technical analysis . A gold trading tip we offer is that fundamental and sentiment analysis can help you spot trends, but a study of the gold price chart and patterns can help you enter and exit specific trades.

Trading gold vs trading forex

Gold has traditionally been seen as a store of value, precisely because it is not subject to the whims of governments and central banks as currencies are. Gold prices are not influenced directly by either fiscal policy or monetary policy and will always be worth something – unlike a currency that can end up being almost worthless because, for example, of rampant inflation.

Gold can also be used by traders as a “safe haven”, along with assets like the Japanese Yen, the Swiss Franc and the notes and bonds issued by the US Treasury. That means that when traders are worried about risk trends they will tend to buy haven assets. On the flip side, traders tend to generally sell haven assets when risk appetite grows, opting instead for stocks and other currencies with a higher interest rate. This makes gold an important hedge against inflation and a valuable asset.

Note, though, that while it is possible to trade the Swiss Franc or the Japanese Yen against a variety of other currencies, gold is almost always traded against the US Dollar. Therefore, trading gold means you will need to take into account the movements of the US Dollar. For example, if the value of the US Dollar is increasing, that could drive the price of gold lower. Keep up to date with the US Dollar and key levels for gold in our gold market data page .

An additional factor to take into account when learning how to trade gold includes market liquidity. The World Gold Council estimates that average daily trading volumes in gold are higher than in any currency pairs other than EURUSD, USDJPY and GBPUSD. That makes it higher, for example, than the daily trading volume in EURJPY, so spreads – the differences between buying and selling prices – are narrow making gold relatively inexpensive to trade.

Lastly, gold trading hours is nearly 24 hours per day. Gold exchanges are open almost all the time, with business moving seamlessly from London and Zurich to New York to Sydney and then to Hong Kong, Shanghai and Tokyo before Europe takes up the baton again. This means liquidity is high around the clock although, as with foreign exchange, it can be relatively quiet after the New York close, with lower volumes and therefore the possibility of volatile price movements.

How to trade gold using technical analysis

Technical traders will notice how the market condition of the gold price chart has changed over the years. Gold prices were in a sizeable trend from 2005 to 2020. Since 2020, gold prices have been trading in a defined range, changing hands between $1,000 and $1,400. In our DailyFX courses, we talk about matching your technical gold trading strategy to the market condition. If the market is trending, use a momentum strategy. If the gold chart is range bound, then use a low volatility or range strategy. This is a key ingredient in a gold trading strategy.

Gold Price Chart, Monthly Timeframe (June 2004 – June 2020)

For those who prefer to use technical analysis, the simplest way to start is by using previous highs and lows, trendlines and chart patterns. When the gold price is rising, a significant previous high above the current level will be an obvious target, as will an important previous low when the price is falling.

Also in an uptrend, a line on the chart connecting previous highs will act as resistance when above the current level, while a line connecting previous higher lows will act as support – with the reverse true in a falling market. As for chart patterns, those like head-and-shoulders tops and double bottoms are relevant just as they are when trading currency pairs.

For the more sophisticated technical trader, using Elliott Wave analysis , Fibonacci retracement levels , momentum indicators and other techniques can all help determine likely future moves

How to trade a symmetrical triangle pattern on the gold chart

Gold trading tips for beginners and advanced gold traders

Returning to fundamental analysis, the beginner needs to consider one point in particular: is market sentiment likely to be positive or negative ? If the former, then the gold price is likely to fall and if the latter it is likely to rise. This is therefore the simplest strategy to use when trading gold.

For the more advanced trader, though, it is important to consider too what is likely to happen to the Dollar. In recent years, the Dollar has become increasingly regarded as a safe haven as well, which explains in part why the gold price in Dollars has remained relatively stable. Thus if you think, for example, that the geopolitical situation is going to worsen, you might consider buying gold but at the same time selling, say, the Australian Dollar against its US counterpart.

An advanced trader will also want to keep an eye on the demand for gold jewelry. In India and China in particular, gold jewelry is still seen as an important long-term investment, it has its uses in industry too and central banks’ buying and selling of gold can also be important – all factors that can move the price.

As for supply, advanced traders will want to keep an eye on the output figures from the main producing companies such as Barrick Gold and Newmont Mining.

That said, all the rules of trading forex also apply to trading gold. Retail traders need to be careful not to over-leverage and to think about their risk management, setting targets, and stops in case something goes wrong.

Our principal gold trading tips are therefore:

  • Consider whether the markets are in “risk on” or “risk off” mode;
  • Look at the likely performance of the US Dollar as well as the gold price;
  • Consider a mix of fundamental, sentimental, and technical analysis;
  • Watch out for central bank buying or selling;
  • Consider the demand for gold jewelry;
  • Look at the industrial demand for gold;
  • And take account of the supply position.

You might also be interested in.

  • Trading the Gold-Silver Ratio: Strategies and Tips
  • What is Gold? Understanding Gold as a Trader’s Commodity

Resources to help you trade the markets

Whether you are a new or an experienced trader, at DailyFX we have many resources to help you: analytical and educational webinars hosted several times per day, trading guides to help you improve your trading performance. You can l earn how to trade like an expert by reading our guide to the Traits of Successful Traders .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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