Everyone knows that a Forex broker provides access to the financial markets; to be more exact, to the currency market, of the foreign exchange market.
They are the link between retail traders and the interbank market. For retail traders to access the biggest financial market in the world, an intermediary is needed. Forex brokers fill this gap.
But competition among Forex brokers has become tougher and tougher by the day. It is only normal if you think of the size of the market and who the market participants are; over five trillion dollars exchange hands every day and the retail traders are only about five percent of all transactions.
Therefore, Forex brokers fight for only five percent of the market participants. No wonder competition is so stiff. There are two things brokers do:
– Attract new clients. Aggressive campaigns and promotional efforts result in increasing the number of potential clients.
– Retain existing clients. Brokers look for incentives to keep existing clients and to make sure they trade.
One of the ways to achieve this is to diversify the product offering. The name of a Forex broker suggests currency pairs are traded by its clients, but these days currency trading is only part of what a broker really offers.
Commodities (gold, oil, silver, cotton, etc.) treasuries, indices (DJIA – Dow Jones Industrial Average, S&P500, Dax – German index, Cac40 – French index), and even individual stocks form a broker’s offering. They come in the form of CFD’s (Contracts for Difference) and the only difference between trading a currency pair and a CFD is that the margin needed as a collateral for each trade is considerably higher for CFD’s.
Out of all these products, gold is the most famous one and most popular among retail traders. There are various reasons for that.
Gold as a Safe-Haven
Gold has long been viewed as a safe-haven. Investors pour into gold when in doubt of economic performances.
Recently, one of the most famous investors in the United States officially said that he wanted to buy some currencies at the start of 2017, and because none was appealing (either having a negative interest rate or the economy it represented was in bad shape), he bought gold instead.
Gold as money is not a new concept. Gold coins circulated for centuries and was a solid form of payment, with two important characteristics; it didn’t lose value and it could be easily exchanged for goods and services.
Gold is part of central bank’s history too. Even the current financial system as we know it started with gold backing the fiat money in circulation. That is, for the amount of money in circulation, a certain gold quantity existed in a central bank’s vault.
Since the ‘70s, that is not true anymore. The gold standard was abandoned by the United States, despite the Bretton Woods agreement, and now currencies simply “float” against each other, with the U.S. dollar being the world’s reserve currency.
Gold is paired with any currency, but the most popular is for gold to be traded against the U.S. dollar. The pair is XAUUSD and it is part of every Forex broker’s offering.
The XAUUSD pair is a volatile one. For this reason, trading it, it is different than trading a regular currency pair. The biggest mistake traders make when buying or selling the XAUUSD pair is to believe it is just another Dollar pair.
It is not. Because of the safe-haven status mentioned earlier, gold and the U.S. dollar have an inverse relationship: when the Dollar rises, gold falls. Maybe not in the same percentage but the general trend should be this one.
This makes it interesting to look at the Dollar’s relationship with the economic news in the United States, and with what makes the central bank, the Federal Reserve of the United States, moving on rates. What is bullish for the Dollar should be bearish for the XAUUSD pair, and the other way around.
The secret is to look at the medium to long-term perspective. If you stick with the hourly chart or lower, the inverse relationship is not that obvious as it could be that from time to time the relationship is that strong.
However, sticking with the bigger time frames and with what the regular implications from a rate hike or rate hike from the Fed means will result in knowing how to trade gold.
One more thing; gold is moving much based on supply and demand imbalances. Production levels and fluctuations matter too. Therefore, there are various other things to look at when trading gold, not just interpreting it as any U.S. Dollar pair.
What matters the most is that gold is NOT only the XAUUSD pair. This is just the pair that expresses its value against the American Dollar. But gold can be expressed against GBP, EUR, and so on, without having anything to do with the U.S. dollar.