Gold is Not Glittering This Year

It has certainly been a tough year for those with an eye on gold trading. For thousands of years, gold has been a popular asset in the financial world, and we’re talking about way before trading as we know it was even a thing. In fact, gold coins first went into circulation as currency as early as 550 BC, when King Croesus of Lydia was in power in a land that nowadays is modern-day Turkey. Since then, gold has played a major role in the financial systems of the world, ultimately leading to a term we used even today (albeit with a slightly different meaning): the Gold Standard. According to the World Gold Council, “The Gold Standard was a system under which nearly all countries fixed the value of their currencies in terms of a specified amount of gold, or linked their currency to that of a country which did so.” One such currency pegged to gold under the Gold Standard was the US dollar, however, during World War II, it became obvious that the system was no longer tenable and had to be replaced, thus leading to the Bretton Woods Conference in 1944 and ultimately the dissolution of the Gold Standard in 1971.

Why are we talking so much about the connection between gold and the US dollar? Because even though the Gold Standard has become obsolete, the two are still invariably linked on the world’s financial systems, so understanding their history can help one comprehend their trading behavior even today. One thing that keeps gold and the US dollar bound so tightly is the fact that the transactions of major commodities—which includes gold and other precious metals—are conducted in US dollars. When the currency is strong, it becomes pricier for foreign investors to partake in, thus resulting in diminished demand and subsequently lower gold trading prices.

But that’s just the tip of the iceberg. Nowadays, this year in particular, there are so many elements converging at the same time that are having a significant impact on the price of gold, both when traded as a commodity as well as the knock-on effect gold can have on other financial assets, such as government bonds. There’s no easy way to break it down, so let’s take a closer look at the various factors that can affect gold trading prices, especially those that are most prevalent this year, to better understand why they’ve been tanking so badly.

Gold trading prices actually started the year on an upward trend, surging nearly 12% between 27th January and 7th March, a period when prices hit over $2,000 an ounce, as concerns over the Russian/Ukrainian conflict spread. This, of course, shouldn’t have come as a surprise, considering geopolitical conflict usually shows up in some form of market volatility. But since then, gold trading prices have suffered a steady decline, and experts are pointing to several different culprits.

The first likely suspect is the Federal Reserve, which has been on an interest rate hiking spree over the past few months in order to combat the staggering inflation that’s developing in virtually every country around the world. As if the pandemic aftermath weren’t already enough to contend with, the Russia/Ukraine conflict is only adding fuel to the fire by boosting energy and food prices. By the end of September, the Fed had increased interest rates for the third time, then adding insult to injury by mentioning that even more hikes could be on the way in November and December. Almost immediately the US dollar shot up to its highest rate in over 20 years, putting it up 16% against a handful of other major currencies for the year. And like we just said, as gold is traded in US dollars, gold trading prices continued their descent as the USD became more expensive for foreign investors.

Another factor that’s gaining its share of blame includes government bonds, the yields of which move oppositely to prices, which have increased as the Fed’s policy got tighter. According to CNN Business, the 10-year US Treasury yield was around 3.77% in late September, after starting the year near 1.5%. Why do government bonds matter to gold prices? Because like government bonds, gold is considered a “safe haven” investment, thus putting the two in direct competition with each other. Thus, if bonds start to look better, gold trading prices end up suffering.

It’s not just the United States that’s draining the life out of gold commodity prices. As previously stated, inflation is running rampant in many other countries around the world, leading to interest rate hikes elsewhere. In September, the Bank of England shot interest rates up to the highest since 2008, while countries like Switzerland, Indonesia, Norway, Sweden, and Vietnam followed suit and raised their own rates in an attempt to preclude further inflation. “It’s really hit home…” said Warren Patterson, head of commodities strategy at ING. “You’re seeing monetary tightening across the board from most central banks out there.”Therefore, with inflation seemingly unstoppable at the moment, it’s likely that gold’s bearish moment may stick around for the long haul, with gold commodity prices probably not making any kind of a comeback this year, Patterson added.

As the old saying goes, “The darkest hour is just before dawn,” which seems to be holding true for gold commodity prices. According to a forecast by Capital Economics, gold commodity prices are expected to decline even further by the year’s end, going as low as $1,650, before making a somewhat robust return next year. “Having fallen sharply in Q2, we think that the gold price is now close to a cyclical trough,” said Caroline Bain, chief commodities economist at Capital Economics. “What's more, the price should revive a little in 2023 as markets factor in the prospect of U.S. monetary tightening.”

The analyst had a similar projection for the US dollar as well as 10-year Treasury yields, which may—considering their connection with gold—also help to bolster gold commodity prices. “We now expect the 10-year Treasury yield to rise a little to around 3% at end-2022 (4% previously) and 2.75% at end-2023, which points to higher real yield expectations too," Bain said. "Meanwhile, we continue to forecast that the U.S. dollar will appreciate a little from here, given that we think the U.S. economy will hold up better than other advanced economies in Europe and Asia and that interest-rate differentials will continue to favor the dollar."

When it comes to gold trading as CFDs or Contracts For Difference, it’s not just declines in gold commodity prices that traders need to focus on; increases are just as important because CFDs allow you to take advantage of price movements in both directions. Therefore, it’s vital to stay current with all the factors that can affect gold prices in order to make well-rounded, knowledgeable trading decisions.

It’s also essential to have a solid understanding of how gold and other precious metals can be traded as CFDs, and that means taking time to educate yourself on exactly how CFD trading works. When you choose a CFD broker, make sure they offer educational resources that you can use to learn the ins and outs of CFD trading, not just for gold and other commodities but also for all types of financial instruments such as shares, forex pairs, cryptocurrencies, ETFs and indices. Most brokers will offer several types of educational materials including PDF guides, video tutorials, and a demo account.

PDF trading guides are a great way to get started because you can read them at your leisure as many times as you need to understand the content. You’ll usually find them available for all trading levels, from basic guides that explain rudimentary topics like “What is CFD trading?” to more complex topics including technical analysis and advanced trading strategies. Video tutorials are also an invaluable source of information, as they are more or less a live version of the PDF guides, so you can see the actions you’re reading about, such as opening and closing a CFD trading deal, done right before your eyes. Finally, a demo account is something all traders, regardless of their experience levels, should take advantage of. For less-experienced traders, a demo account provides an opportunity to put their skills to the test and open and close trading deals without risking actual money so that, when it comes time to actually invest their own funds, they’ll be familiar with the process. However, for advanced traders, a demo account can be a great way to learn their way around a new trading platform.

At the end of the day, CFD trading of gold and other instruments comes with the same risk as all forms of trading, so the more knowledge you enter with, the more confidently you can trade.