The gold futures market offers plenty of opportunities for day traders and swing traders alike. Gold prices can often be volatile, an attractive quality for traders seeking to exploit large moves within a short period of time. Gold also happens to be a liquid market, making it easier for traders to buy and sell positions. Leverage comes in different sizes, from micro gold contracts to standard contracts, making it easier for traders to match their capital resources with the appropriate risk exposure.
Though most short-term traders are “technically” inclined when it comes to market analysis, it really helps to understand the gold market and its underlying factors from an industry perspective. If you can’t see the market from a larger supply and demand perspective, then you either risk missing the boat on opportunities that you might have seen coming months ahead, or you might get blindsided with a market event that you should have seen coming.
In this article, we’ll offer a few tips to help you get a good grasp of the more fundamental side of the gold market. Let’s start with gold’s importance to the global economy—specifically, the factors that drive gold demand on a daily basis.
Gold’s Role in the Global Economy
Most of the world may not be operating on a “gold standard,” but the yellow metal still plays several roles in the world economy as both a monetary/investment and industrial metal.
According to Statista, in 2021, global gold demand consisted of the following:
- Jewelry: 55.43%
- Investment: 25.02%
- Central Banks: 11.33%
- Technology: 8.21%
Gold demand for making jewelry drove sales for over half of the industry, followed by “safe-haven” demand. Central banks took a sizable chunk (more on that later), and tech companies came in fourth (e.g., your smartphone may be something of a proverbial gold mine if you consider its gold components).
But what’s with central banks owning gold? Isn’t gold an outdated relic?
Why Do Central Banks Still Hold Gold in Reserve?
Gold may not be considered a form of “legal tender” currency in most countries. The “gold standard” is long gone. And most people on the street might not even consider gold a relevant form of money (younger investors might not even know that we were on a gold standard until 1971).
Still, if gold was truly outdated as a monetary asset, central banks wouldn’t be accumulating the yellow metal to diversify their foreign exchange reserves.
In other words, central banks still consider gold to be a global reserve currency in addition to being a store of value or a hedge against economic uncertainty. So, don’t count gold out yet.
Rumors of a New Gold Standard in the East
China and Russia have been accumulating their gold reserves over the last few years. Both countries have announced their plans to create a new BRICS reserve currency (BRICS is short for Brazil, Russia, India, China, and South Africa) to rival and potentially undermine the US dollar.
Russia also proposed revaluing gold via the Moscow World Gold standard, rivaling the London Bullion Market Association.
So, what does this all mean?
Tip 1 – Pay Attention to Global Economic and Political Events
Both of the developments above can have significant consequences for the price of gold and the value of the US dollar. As a trader, you will want to pay attention to both central bank gold purchases and also the current geopolitical and macroeconomic developments happening in the east as well as the BRICS regions.
In addition to this, you will also want to monitor general conditions such as regional economic booms and busts, geopolitical tensions, and natural disasters—things that cause people to load up on safe-haven assets.
If you can monitor these developments, then you might be able to anticipate market turns long before they take place.
Tip 2 – Stay On Top of Gold Price Trends
This should be pretty easy for you, as it requires you to make use of your charting skills. Look for gold trends on a small and large scale. Look for critical support and resistance areas. Take a look at the volume-driven buying pressure and selling pressure. Note all chart patterns that may be relevant to your trading strategy.
This is where you might have an edge over the purely fundamental investor: a trader can’t time the market timing using fundamentals alone; you need to see the technical picture.
Tip 3 – Don’t Forget to Track Supply and Demand
No, supply and demand is not what you see on the chart (where people are buying and selling). Sure, it reflects supply and demand, but only after the fact.
We’re talking about supply and demand from an industrial perspective: mining production, central bank buys and sells, fabrication demand, tech demand, etc. These fundamentals are what drive the gold market.
Your job is to assess whether there’s enough supply to satisfy demand or whether there might be a mismatch between the two.
If you can put together a comprehensive picture of the supply demand scenario, then you might be able to position yourself for opportunities that other traders who ignore these fundamentals might miss.
Tip 4 – Get to Know the Big Players
Retail traders of investors typically can’t move markets unless they’re all moving at once in the same direction. Think of the viral social media posts that cause swarms of traders to buy or sell so-called meme stocks.
Most of the time, however, you want to keep an eye on the big players: central banks, mining companies, and investment funds.
If you can monitor their gold activity, then you might be able to anticipate how the gold market might respond in the near term.
But where can you find all of this information? This is an important question, and here’s the answer.
Tip 5 – Get Your Information From Gold Industry Trade Groups and Associations
If you want to stay informed about the latest developments in the gold market and industry, you need to follow key industry-level sources to get the latest information. Here are a few of the biggest ones.
- The World Gold Council (WGC) is a gold mining industry group that regularly provides comprehensive information on gold purchases in addition to global supply and demand conditions.
- The London Bullion Market Association (LBMA) is the world’s largest association of market makers in gold and silver bullion. When it comes to banks and investment funds purchasing physical bullion, all roads typically lead through the LBMA.
- The International Precious Metals Institute (IMPI) is a professional group for gold and silver miners, refiners, manufacturers, fabricators, and distributors. This group provides a more granular view into the industry. You can’t get a full view of the market unless you see the nitty-gritty segments that comprise it.
- The National Mining Association (NMA) is another industry trade group that provides valuable information. This group has a narrower focus, as it represents mining companies in the US.
- And finally, the Gold Industry Group (GIG) is like the NMA, but this one focuses on mining in Australia which is, as you might know, a big gold producer.
Check out their websites, social media feeds, newsletters, or publications.
The Bottom Line
If you were trading the gold market solely based on charts, then try adding these sources and their insights to the mix. A much bigger picture awaits. Not only are you getting closer to becoming a specialist in the gold market, you might even gain an edge over other traders who can’t (or refuse to) see the bigger picture.
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.