Participants that trade gold need to be very aware of news events as they unfold if they want to protect their position. To Trade Gold Safely a trader must strike a comfortable balance between allowing enough room for their position to breathe and fluctuate while not suffering from potential backlash. The XAUUSD can be one of the more sensitive commodities thanks to the traditional role of gold and United States Dollar as safe havens. The gold trader should be very aware of upcoming, high volatility economic events and always keep a wary eye on the current news.
The Effect Of Regular News On Gold
Not every event will impact the positions of those that trade gold. There is always the possibility of an impact that can kick start a massive buy or sell off that has little to do with actual economic event. One such example comes from the early years of the forex market. The first high spike of gold reached over $800 an ounce in the early 1980’s thanks in part to high inflation, the Iranian Revolution, and the Russian intervention in Afghanistan.
The high inflation point is obviously an economic circumstance, but the Revolution and intervention drove speculators that trade gold who sought safety in coming world turmoil. It wasn’t clear how these events would impact the world economic situation but gold is typically considered to be the safest place to shield one’s assets.
A more recent example is highlighted in the XAUUSD daily chart. The massive bearish candlestick coincides with April 15th, 2013. It is thought to be the result of inflation and a knee-jerk reaction to the Boston Marathon Bombing. Typically, one would expect there to be reactionary buying as investors moved their USD to a safer commodity. This reaction supports speculation that gold has been battered by the EU crisis and is not finished with its bearish correction from former $1800 highs.
Economic Events To Be Wary Of
Every trader needs access to an Economic Calendar that can alert them to upcoming high volatility events. There are many free ones online. Essentially, any high volatility event involving the USD or central banks could possibly have an impact on the value of gold. There is another type that can have a drastic affect on the USD that is almost always tagged as a “low volatility” event. These are announcements from the big names in economics and from the Fed. If a calendar notes one of these people is going to give a speech- treat it as a high volatility event with the potential for massive USD movement.
Is the correlation direct? Not exactly. Instead, participants that trade gold are faced with falling value and increased cost of production. That makes economic calendar events that strengthen the USD a potential windfall for XAUUSD bears because gold is in such a slump that it isn’t likely to have reached a recoverable level.
A Warning On News Events
Anyone that wants to trade gold, commodities, or other forex pairs needs to be aware that any news item can have significant impact on their position. It is important to use good risk management practices to ensure you do not get taken out of a position prematurely at a high loss. It is best not to open a position just before a major news event is about to hit. No matter how good of a handle a trader thinks they may have on their analysis, the market can rebound from the knee-jerk reaction other participants will have as they protect their positions.