Gold trading strategies: Gold and seasonal patterns, gold prices and US Treasury rates, Moving average

If you are a short-term gold trader, you should focus on the gold seasonal pattern, and if you are a long-term gold trader, you should focus on the level of US Treasury rates.

Gold trading strategies for short-term and long-term traders

Gold attracts different categories of investors for various purposes. Short-term investors trade in gold to make trading profits. Long-term investors buy gold as part of asset allocation, for financial planning goals like their child’s wedding, or as a safe haven against inflation. In this article, we will focus on gold traders and discuss how to trade gold. We will discuss some gold trading strategies you need to know about.

1) Gold and seasonal patterns

If you are a short-term trader, you should focus on the seasonal pattern of gold. Yes, the price of gold tends to follow a seasonal pattern. 

Seasonal pattern in gold

Seasonal pattern in gold

(Source: https://tradingstrategyguides.com/simple-gold-trading-strategy/)

As seen in the above chart, gold price has been following a seasonal pattern since 1973. In the months of January, February, September, November, and December, the price of gold tends to move higher than average. So, as per historical data, these months are good for going long on gold. During March and October, the price of gold tends to move lower than average. So, as per historical data, these months are good for going short on gold.

Now let us now look at how the price of gold has moved in the month of January during specific years.

Gold price movement in January (2015-2018)

Gold price movement in January (2015-2018)

(Source: https://tradingstrategyguides.com/simple-gold-trading-strategy/)

As seen in the above chart, the price of gold has moved up in the month of January during the period 2015-2018. So, as a trader, you can plan your short-term gold trades in specific months using gold seasonal pattern as a reference parameter.

Related: Crude oil, Gold, or Copper: Which are the best commodities to trade in India?

2) Inverse relation between gold prices and US Treasury rates

The above section discussed how a short-term gold trader can use gold’s seasonal pattern to buy and sell gold in specific months of the year. But if you are a long-term gold trader, you need to look at the US Treasury rates for the long-term gold price trend.

Usually, US Treasury rates and gold prices have an inverse relation. When the US Treasury rates move up, gold prices tend to move down; and when US Treasury rates move down, gold prices tend to move up.

Inverse relation between US Treasury rates and gold prices

Inverse relation between US Treasury rates and gold prices

(Source: https://www.forex.com/~/media/forex/files/education/guides/us/keys-to-trading-gold-us.pdf)

As seen in the above chart, during the 2008-09 financial crisis, the US Federal Reserve cut interest rates aggressively. Once the US economy emerged from the financial crisis, the US Federal Reserve started tightening interest rates during 2012-13 and gold prices fell. 

Between 2013 to 2016, the real interest rates in the US went down. During this period, gold prices saw a big rally from USD 800 to USD 1800 per ounce.

The chart shows a clear inverse relation between gold prices and US Treasury rates. So, if you are a long-term gold trader, you should look at the US Treasury rates to decide the long-term direction of gold prices.

3) Moving average (MA) crossover

The above sections showed how a short-term trader can trade by looking at gold seasonal pattern and how a long-term trader can trade by looking at US Treasury rates. However, whether you are a short-term or long-term trader, you can decide your entry point based on certain technical analysis parameters such as the moving average (MA). 

A simple MA is the average of the closing prices for a stock/commodity/currency, etc. for a specified number of days. For example, a 20-day MA is the average of the closing prices for a specified period of 20 days. Gold traders analyse the gold price chart with various MAs such as 20-day MA, 50-day MA, 100-day MA, etc.

A gold trader will usually buy whenever a short-term MA crosses a longer-term MA. For example, if a 50-day MA were to cross over a 100-day MA, a gold trader will take that as a buy signal and initiate a long trade. Likewise, when a short-term MA falls below a longer-term MA, a gold trader will usually sell. For example, if a 50-day MA were to fall below a 100-day MA, a gold trader will take that as a sell signal.

Gold price chart with moving averages

Gold price chart with moving averages

(Source: https://www.valutrades.com/en/blog/5-tips-for-trading-gold-xau-usd)

The above gold price chart displays the 50-day MA in yellow and 100-day MA in red. In April 2020, when the COVID-19 pandemic started spreading globally, gold’s 50-day MA crossed the 100-day MA. After this MA crossover, the prices of gold rallied significantly over the next few months. In fact, gold gave one of the best returns in 2020 as compared to the previous many years.

Related: Gold ETF vs gold savings fund: Which one is right for you?

Last words

A gold trader can do a short-term trade based on gold seasonal pattern or a long-term trade based on the US Treasury rates. Once the trader decides whether they want to do a short-term or long-term trade, they can use technical analysis parameters such as moving averages (MAs) to time their entry and exit. MA is just one of the technical indicators. As the trader moves deep into gold trading, there are many other technical indicators that they can look at, and frame other gold trading strategies accordingly.

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