Gold forex trading: how do you trade gold on forex markets?

Gold nuggets
Rebecca Cattlin
By :  ,  Former Senior Financial Writer

What is gold forex trading?

Gold forex trading is the term used to talk about the ways you can gain exposure to gold via FX markets. Instead of buying and selling the precious metal, or speculating on its price using futures, you can trade it as a dollar-denominated currency pair or via gold-linked pairs.  

As historically gold was used as a currency, it’s not surprising that it’s still an internationally recognised part of the forex market. It trades under the currency code XAU.

Trading gold in the forex market can be a great way for currency traders to get exposure to the commodity and diversify their portfolio. Its stability when compared to other assets during global crises means it’s a popular hedge against inflation. Often, the commodity gets a lot of attention around large market-moving events when investors get spooked and rush into the metal as a safe haven.

For example, amid the Covid-19 pandemic, governments and traders started moving money into gold to protect against losses due to inflation.

Can you trade gold on forex markets?

Yes, you can trade gold on forex markets using the XAU/USD currency pair. This is the spot price of gold, which tells you how much 1 troy ounce of gold costs in US dollars. Alternatively, you can get exposure to gold prices by trading other currency pairs that have a correlation with the precious metal – these include the US dollar, Australian dollar, South African Rand and Swiss Franc.

Gold and the US Dollar

Traditionally, the relationship between gold and the US dollar has been an inverse correlation. As investor optimism has increased, money has flowed out of gold and into currencies, while periods of economic concern have created inflows into gold away from higher-risk assets (like FX).

However, it’s important to note that the USD isn’t the only factor involved in gold’s pricing. This means that sometimes the correlation between gold and USD isn’t so straightforward and doesn’t always move 1 for 1. Especially as there have been instances of the US Dollar being considered a safe haven, due to its use as a global reserve currency, which has seen the asset classes move in tandem.

Trade USD currency pairs with us by opening an account or creating a risk-free demo account.

Gold and the Australian Dollar

Gold and the Australian Dollar have an extremely tight relationship due to Australia’s position as the third biggest gold producer in the world. It contributed about $5 billion worth of gold each year.

As such, gold has a positive correlation with AUD/USD. When gold goes up, AUD/USD tends to go up. When gold goes down, AUD/USD tends to go down. In fact, studies found that a 1% increase in the nominal gold price led to a 0.5% appreciation of the AUD/USD nominal exchange rate.

Trade AUD/USD with us by opening an account or creating a risk-free demo account.

Gold and the South African Rand

The South African Rand is often correlated with Gold as South Africa is a large exporter of gold. So, when the gold price goes up, it’s thought that the price of ZAR will rise too. This was particularly true when the Rand first entered circulation, but the correlation is still present as the precious metal represents about 15% of the country’s total exports.

You could trade this correlation through the USD/ZAR pair, which would in theory have an inverse relationship to the gold price.

Trade USD/ZAR with us by opening an account or creating a risk-free demo account.

Gold and the Swiss Franc

The Swiss franc has traditionally moved in line with gold, given that more than 25% of Switzerland's money is backed by gold reserves. The Swiss Frac is a fairly common proxy for gold. We saw this relationship in full force in early 2020 following geopolitical tensions between the US and Middle East – gold rallied to around $1560 per troy ounce and the franc followed to trade at intraday highs of $1.03.

So, in order to trade gold, you’d be looking at the negative correlation it has with the USD/CHF pair: when gold price goes up, USD/CHF goes down and vice versa.

Trade USD/CHF with us by opening an account or creating a risk-free demo account.

Gold forex risk factors

There are a few factors you need to consider before you trade gold on forex markets:

  • Liquidity – the ease to which you can enter positions can fluctuate throughout the day. However, the average daily trading volumes of gold pairs tend to exceed all currency pairs, excluding EUR/USD, GBP/USD, and USD/JPY
  • Supply and demand – like any market, when demand is up and supply is down, price rises, and if supply increases and demand drops, prices will fall. Half of the global demand for gold is driven by jewellery production, while another 40% comes from investors
  • Market volatility – as we’ve mentioned, the volatility behind gold’s price is driven by its use as a safe haven. When other higher-risk assets aren’t performing, people move to gold. In contrast, when risk-on assets are strong, gold trading levels fall

How to trade gold in forex

To trade gold in forex, you need to go through a few quick steps:

  1. Open a City Index account or log in to an existing account
  2. Search for a currency pair in our platform
  3. Decide whether to go long or short on the price
  4. Enter your positions, attaching stops and limits as necessary
  5. Monitor and close your trade

Not ready to trade live forex markets? Practise trading gold-linked currencies in a risk-free environment with a demo account.

Can you day trade gold in forex?

It is possible to day trade gold in forex, but it’ll depend on the market conditions at the time because gold is a relatively stable asset most of the time – until there’s a period of economic uncertainty and more volatility.

As XAU/USD tends to trade in a range, reaching previous highs or lows over time, strategies that take advantage of these moves tend to be more popular. By identifying these buy and sell points you can, for example, open a position on gold when it’s trending up and target a known level of resistance as your sell price. Compared to day trading, this is a relatively low-risk strategy and not designed for quick profit but benefits from the more reliable XAU/USD price movement.

Gold forex trading times

Gold forex is a 24 hour market, but peak trading volume is usually found in New York trading hours, which are between 1pm to 10pm (UTC).

Trading gold markets during peak activity will offer higher liquidity and lower volatility, making them good targets for safe-haven positions. Alternatively, trading gold in lower volume hours can mean less liquidity but provides the extra volatility needed to execute shorter-term strategies.

Discover what forex trading hours are

Related tags: Gold Forex Insights Commodities

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